Economists and market participants are on recession watch as we flip the calendar to 2023. The Federal Open Market Committee, or Fed, embarked on an aggressive campaign to fight inflation in 2022 that is just now starting to wind down. The Fed is expected to bump rates by a quarter point at the February meeting and then one last time at the March meeting. At that point, they are expected to hit the pause button and wait to see just how much damage has been inflicted.
So far, the results are somewhat mixed. Inflation as measured by the Consumer Price Index has started to roll over but remains elevated. After peaking at an annual rate of 9.1% this past summer, the latest CPI number from December has cooled to 6.5%. Much of the decrease has come in the more volatile food and energy components of the index where prices have dropped significantly. Some of the fall is related to the normalization of global supply chains. However, the Fed’s aggressive actions have no doubt started to have an impact as well.
So far, the results are somewhat mixed. Inflation as measured by the Consumer Price Index has started to roll over but remains elevated. After peaking at an annual rate of 9.1% this past summer, the latest CPI number from December has cooled to 6.5%. Much of the decrease has come in the more volatile food and energy components of the index where prices have dropped significantly. Some of the fall is related to the normalization of global supply chains. However, the Fed’s aggressive actions have no doubt started to have an impact as well.
Signs of a slowing economy are popping up all over as the increase in interest rates take their toll. The rate increases had an immediate impact on housing as borrowing costs more than doubled early in the year and new housing starts and refinancing activity stalled dramatically. The change in interest rates also had an immediate impact on financial markets. Investors saw one of the worst years since the Great Financial Crisis with both stock and bond prices tumbling.
We noted last quarter that the Leading Economic Indicators Index turned negative. This along with an inverted yield curve are strong signs of an economic contraction in the months ahead. However, despite all these falling dominoes, there are two very important dominoes still standing. While some cracks have started to appear, the labor market and closely related consumer spending measures are holding strong. With nearly two thirds of the U.S. economy tied to consumer spending, we are not likely to get a recession unless these last dominoes topple over.
Some signs of a weaker consumer are apparent with potential retail bankruptcies from Bed Bath and Beyond as well as Party City reported recently. Additionally, the tech sector is trying to protect profits with large layoff announcements from Tesla, Twitter, Microsoft, Alphabet, and Amazon to name a few. Despite these large layoffs, the unemployment rate is just 3.5% as of the most recent Bureau of Labor report. There are still nearly 2 jobs for every unemployed person with 10.1 million jobs not filled as of the January 4th data. Finally, wage gains remain elevated at an annual increase of 5.8% year-over-year which further supports consumer spending.
We noted last quarter that the Leading Economic Indicators Index turned negative. This along with an inverted yield curve are strong signs of an economic contraction in the months ahead. However, despite all these falling dominoes, there are two very important dominoes still standing. While some cracks have started to appear, the labor market and closely related consumer spending measures are holding strong. With nearly two thirds of the U.S. economy tied to consumer spending, we are not likely to get a recession unless these last dominoes topple over.
Some signs of a weaker consumer are apparent with potential retail bankruptcies from Bed Bath and Beyond as well as Party City reported recently. Additionally, the tech sector is trying to protect profits with large layoff announcements from Tesla, Twitter, Microsoft, Alphabet, and Amazon to name a few. Despite these large layoffs, the unemployment rate is just 3.5% as of the most recent Bureau of Labor report. There are still nearly 2 jobs for every unemployed person with 10.1 million jobs not filled as of the January 4th data. Finally, wage gains remain elevated at an annual increase of 5.8% year-over-year which further supports consumer spending.
We will be watching these last two dominoes closely in the months ahead. If they fall, then the expectation is for a shallow recession. If they remain standing, then the Fed will have achieved the soft landing they were aiming for. In either case, we are looking at little to no economic growth in 2023 and much of this is likely priced into financial markets.