While to an outside observer the beginning of 2023 may look great: strong household balance sheets and a stable labor market, the future outlook does not look so rosy. And it’s all about the desire of companies to catch up with strong consumer demand, which, in turn, will keep inflation above the Fed’s goal of 2%, which will only further spur action by the central bank, writes Business Insider.
The Fed has explicitly stated that rising unemployment will be its way of reaching its inflation target, so it will continue to raise rates until there is a significant deterioration in the labor market, meaning layoffs that will cover not one but several sectors at once. Fed Chairman Jerome Powell explicitly stated this, saying that it would take “pain” to bring inflation down.
And while the Fed’s actions have slowed business activity in some areas, most notably the housing market, overall the economy is still afloat and even more so: instead of slowing down, it is poised for growth over the next few months.
The Fed has hinted that it may soften its rate hikes as inflation starts to decline, but the sudden growth of the economy may force it to “step on the gas pedal all the way again.”
As paradoxical as it may sound, the fact remains that despite constant claims that the U.S. economy has been teetering on the brink of recession all year, it has proven quite resilient and there are even signs that it will get stronger.
The most obvious reason for this is that supply chain pressures are easing: instead of empty shelves in stores, businesses have been able to replenish inventories and people can spend their money on what they need. Demonstrating this situation is increased auto sales, which reached an annualized 14.9 million in the U.S. in October, the best level since January. In addition to automobiles, there is growth in other industries that could boost the economy in 2023. For example, aircraft manufacturers such as Boeing (NYSE:BA), which is seeing new orders come in.
As for the housing and new commercial real estate market, even though it was hurt by the Fed’s rate hike, after the initial shock and the leveling of mortgage rates, consumers have started buying real estate again aggressively.
Finally, even the international problems that rocked the world in 2022 – from geopolitical conflict to the energy crisis in Europe to China’s COVID-19 policies – will almost certainly not worsen further and are likely to show signs of improvement.
Even financial market conditions are improving. The Bank of America (NYSE:BAC) Global Financial Stress Index, which attempts to reflect the health of the stock and bond markets, has improved in more than a month, and the rally in the stock market and improvement in the corporate debt market no longer speaks in favor of an impending recession.
Hence the rather ambiguous conclusion: since the economy is growing instead of slowing down, the Fed may change tactics and start to tighten even more sharply until real growth reverses. For the average American, a sustainable economy is a double-edged sword, and their ability to survive a Fed rate hike and record high inflation today could hurt them in the future. So the pain promised by Powell will come, but the only question is when.