Center for Economic Analysis

2023 Economic Outlook

Economists have said it over the last three years, “A recession is right around the corner.” As we enter 2023, these voices are growing louder. However, we’re not convinced that a recession in 2023 is certain. Though many indicators point to an eminent recession in 2023, they also pointed to a likely recession in 2022 and this economy has proven time and again to be more resilient than expected. We suggest anticipating a recession in 2023 but do not bank on a 2023 recession.

Should a recession occur in 2023, banning some economically catastrophic events, it will likely be a shallow recession. There is a caveat to this assertion. The severity of the next recession may well depend on the Federal Reserve’s policies. The Federal Reserve continues pumping the brakes on the economy in an attempt to curtail inflation, and the call for easing such quantitative tightening is growing louder. When the Federal Reserve, as a lender to banks, raises the rate of interest it charges banks, it has slowing effect on the economy. However, it may take six or more months for the effects to be realized. Hence the rate increases imposed by the Fed six months ago are just now playing out in the economy. In the meantime, the Fed continues to ramp up the discount window rate.

Overall, we are optimistic that 2023 will be an economically uneventful year and that the continued growth in the U.S. and Michigan economies, post COVID-19, will continue on into 2024.  

2022 in Review.

Inflation was the hot topic in 2022 and continues to be on the minds of the Board of Governors of the Federal Reserve. Inflation reared its ugly head in 2021, in the aftermath of expansionary monetary policy and COVID-19 stimulus spending by federal and state governments. These dual expansionary effects, along with ramped up production to fill back orders interrupted by COVID-19 resulted in an overstimulated economy. That is, there were more dollars pursuing purchases than goods and services. At the same time, supply chain constraints caused increases in production costs. It was a perfect storm of demand-pull increases in prices and production push increases in prices that made economists concerned about what is called stagflation – the situation where the economy is operating at less than full production, but prices continue to rise. The threat of stagflation promoted a sharp response from the Federal Reserve that persists to this day. 

Labor shortages persisted throughout most of 2022 in what has been called “the Great Resignation,” and it appears it will linger through 2023. A large portion of the older workforce decided to sit out of the labor market following the COVID-19 disruptions. Whether they will eventually return remains to be seen. While workplaces adjusted to the new, leaner workforce, the labor market gradually favored job seekers. Job openings remained elevated even as economists sounded the recession alarm. The anticipation is that this excess demand for workers will elevate wages, especially for blue collar workers. However, it is a struggle for wage growth to keep pace with inflation, and up to this point, the wage gains generated since COVID-19, has largely been negated by general price increases.

Consumer debt rose throughout 2022, driven partially from rising prices relative to earnings. In early 2021, Americans pulled back on expenditures and paid down prior debt with stimulus dollars. Consumers reversed course through 2021 and 2022 with large capital expenditures and home improvement purchases, drawing down their savings. With added inflation, the typical consumer has to spend more to maintain prior expenditures due to inflation. Economists warn that excess consumer debt can amplify recessionary pressures because not only do consumers need to contend with the risks of job loss, but they must also pay down past debts. The Consumer Sentiment Index, a score of how good consumers feel about the state of the economy, reached an all-time low in June of 2022 and has inched up only slightly from there. The takeaway is that consumers are approaching 2023 cautiously.

2023 Economic Projections

Some key things to look for in 2023 include a continued tighten labor market interrupted. Overall, we project continued growth in employment, but the extreme labor shortages of 2021 are not expected to return in 2022, partially because of reduced workplace dependence to workers. While wages and salaries are expected to receive a boost in 2023, we anticipate that inflation will wipe out any real gains in earnings. Expect wages to rise in lockstep with inflation.

The Federal Reserve is poised to retain its hawkish position on inflation into 2023 That is, expect more aggressive attacks on inflation that may threaten economic growth and may even result in a short recession in 2023 or 2024. The aggressive Federal Reserve stance means anticipate interest and mortgage rates to remain high relative to pre-pandemic levels. While it is initially expected that higher mortgage rates will have a deflationary effect on housing prices so far, we have not seen that. As such, some experts are starting to voice concern about a housing market bubble. If such a bubble exist, it will likely not approach that seen in the 2008 market collapse.

The post-pandemic supply chain disruptions should all but abate in 2023, pending final labor settlement in rail transportation. That is, a general rail strike could extend supply chain disruptions, but most of the supply chain disruptions experienced in 2021 and 2022 should be abated in 2023. This will reduce supply-push pressures on inflation. Demand pull inflation may also abate in 2023 in response to the Federal Reserve’s aggressive stance on inflation. Federal fiscal policy is expected to remain loose in 2023, in opposition to that of the Federal Reserve. We expect inflation to continue to moderate in 2023 but remain above Federal Reserve targets.  

Anticipate Gross Domestic Product to expand in 2023 with or without a mid-year recession. Gross Domestic Product (GDP) is a measure of total earnings made in the economy. We anticipate total annual earnings to exceed inflation but not by about three percent in 2023, as consumer prices grow by about 4 percent, while GDP is expected to grow by 7 percent. Short term interest rates are expected to remain high unless the economy slips into a recession. Thirty-year Treasuries are expected to moderate slightly from 3.14% in 2022 to 2.96 in 2023.  

Updated January 1, 2023