Economic Outlook 2023
Employment Steady, Inflation Subsiding, Consumer Confidence Up, Government Stimulus Fading, Fed Tightening 'Should' Stop After .25% Increase at Next FOMC Meeting, Most Global Supply Side Issues have been Corrected, Oil Prices Below a Year Ago, and the Dollar is Strong
January 17, 2023 / NYC Business News / New Analysis & Opinion / Gotham Buzz NYC.
NYC Weather. The temperature highs will be in the mid to high 40's and the temperature lows will be around 40, dropping to 35 degrees on Friday. No rain is expected EXCEPT on Thursday, where up to an inch of rain will fall during the day. Winds will be 5 - 10 mph on Tuesday and Thursday and will be 10 - 15 mph on Wednesday and Friday. Humidity will rise from 45% to 80% on Tuesday, fall back into the 60% range on Wednesday, rise into the 80% range on Thursday with the rain, and fall back into the 60% range on Friday.
I. Economic Background - CoVid Disruptions of Global Supply Chains and U.S. Government Fiscal & Monetary Policy Responses
In recent months I have spent a fair amount of time catching up on what's happening in the economy overall, in an attempt to guage what lies ahead. It's important to realize where we are in the business cycle, in order to figure out what to expect going forward.
* Since March of 2020, we've been in a bit of a pandemic spin. The 2020 pandemic essentially halted most hospitality businesses and softened demand for some services, but drove high demand for both durable and non-durable goods. This is on the demand side. Meanwhile on the supply side, businesses were closing down, or working at far less than capacity, because of the health impact of the pandemic. For example in China, they didn't just appear to shutter businesses, but almost entire cities, to curb the spread of CoVid. China is where much of our electronics are made so this impacted the availability / supply of electronics at a time when Americans were spending more on them, because they weren't traveling, vacationing or even eating out much, so they had extra cash to spend on items, most notably electronics.
The U.S. federal government [as did many governments throughout the world] kept many businesses afloat through expansive monetary policy and generous fiscal spending via CoVid Relief packages which put money in the hands of local businesses, governments and individuals. The fiscal stimulus / excess government spending began in 2020 during the Trump Administration, and ended in early 2021 under the Biden Administration.
The first chart above right shows the federal government excess fiscal spending during the pandemic. Both Trump and Biden temporarily increased government spending in order to keep the economy rolling through the pandemic.
- CLICK here for our report on our perspective on the economic outlook for NYC in 2023.
And the expansive monetary policy, which was executed by taking the federal funds interest rate to nearly zero in March of 2020, and by pushing $4 trillion cash into the economy via purchases of bonds, wasn't reined in for years, and that withdrawal finally began in 2022. We'll discuss this more further down in this report.
The chart at right first shows how the Federal Reserve immediately dropped the federal funds rate to zero in the Spring of 2020, to keep liquidity in the economy as the pandemic hit. And then it shows how the Federal Reserve very, very aggressively jacked up interest rates to offset inflation beginning in 2022, because they were slow to react to the rise in prices in 2021. Federal Reserve Chairman, Jerome Powell, was nominated first by President Trump and renominated by President Biden.
The chart below right, shows how in the Spring of 2020, the Federal Reserve pushed $4 trillion in liquidity into the economy, doubling its liabilities. In 2022, the Federal Reserve began pulling some of that liquidity out of the market / off the table.
* In 2021 things began to normalize as vaccinations rolled out and we began to gain a better understanding of how to mitigate the health impact of the CoVid pandemic. But the year wasn't a straight line out of the pandemic, as the new variants continued to wreak havoc with our collective assessment of how risky it would be to return to normal.
Toward the end of 2021, Russian-like media Oligarch Rupert Murdoch, used his Goebbels-like propaganda outlets, including the NY Post, Fox News and the Wall St. Journal to hype American's uneasiness with supply chains in the economy, which Murdoch propagandist's labeled as Biden's economy.
* In February 2022 economic risks rise, as fascist dictator Russian President Vladimir Putin invaded Ukraine in what he called a 'Special Military Operation'. The Russian War in Ukraine hasn't gone well for Putin. To maintain the war, he is crippling the long term prospects for the Russian economy, as the Russian people continue to act like peasants, allowing the brutal dictator and his elitest friends, to walk all over them, including sending them to their graves fighting for Putin's narcissistic place in history.
Putin's military intervention / disruption, of course added risk to the global economy. Especially in two key segments of the economy which includes food and energy. Russia supplies about 12% of the world's oil, and along with Ukraine accounts for about a third of the world's wheat and barley. Hence Putin's war added significant inflationary pressure to both energy and food.
As you can see in the chart at right, the price of oil spiked up following Russia's invasion of the Ukraine in the Winter of 2022. The price of oil has since come back down to a few bucks below where it was a year ago.
* In November and December of 2022, and continuing into January of 2023, dictator President Xi Jin Ping has been retreating from his draconian, control-freak style CoVid lockdown measures. The Chinese, in a rare break from their own peasantry past, started to rebel against the policies, and so Xi started to relent. The Chinese economic growth fell from 8% in 2021 [like us the growth was accentuated because of a depressed 2020 CoVid economy] to 3% in 2022. Thus, at the end of 2023, in contrast to 2022 [which wasn't anywhere near as bad as Murdoch's Fox, NY Post and WSJ hyped it], things are largely returning to normal - except for the Ukraine situation, which continues.
II. Economic Background - A Recap of Government Responses Included Monetary Policies Layered on Top of Fiscal Policies
To summarize what I laid out above, there were swings in demand fueled by lifestyle changes caused by the pandemic, including generous fiscal spending by the U.S. government. And there were significant supply side swings in capacity, which were driven by worker availability arising from health concerns.
Globally, we've spent the past couple years working through these huge economic demand and supply displacements, due in part to the disruptions of the vaccination roll outs caused by misunderstandings / misinformation about vaccine efficacy, risks and the new CoVid variants. This economic uncertainty was exacerbated by Russian dictator President Putin's undeclared war on Ukraine, which further disrupted the supply of both food and energy - which are two key components of the economy.
So, along with the U.S. governmment's expansive fiscal policies, pursued via massive transfer payments to large and small businesses and individuals, the nation's central bank, the Federal Reserve, pursued an expansive monetary policy by, 1) dropping the Fed Funds rate to nearly zero [0% - .25%] in March of 2020, and 2) they pursued an incredibly expansionary monetary policy whereby they pushed liquidity [cash] into the U.S. financial system by buying a lot of bonds. In the latter move they pushed about $4 trillion into the economy in a very short period of time, doubling their position of prior years.
As you can see in the chart above, inflation picked up toward the end of 2021, peaked in June of 2022, and appears to be heading back down toward normal, which economists expect it will approach by the end of 2023 [3.3% inflation] and in 2024. The Fed benchmark inflation rate is 2.0 - 2.5%.
III. So, Today, Where We At?
What's next is a look at a multitude of economic statistics with some nominal interpretation of what I expect to happen, all things being equal [meaning no further major disruptions], in 2023.
Expansive Fiscal Policies Ending, but the Fed Seems to be Ignoring the Lag Times Inherent in the Multiplier Effect
As you can see by the first graphs at the top of this report, the Biden Administration has already brought the federal budget back into alignment with its historical trend, after a couple of years of excessive spending that began during the last year of the Trump Administration and continued into the first year of the Biden Administration.
In economics there's a lag time between when something is done at the federal level in fiscal policy and its full effects work through the economy. It's called the multiplier effect and I oftentimes wonder if Federal Reserve Chairman Jerome Powell missed the classes in school that focused on it. The lag time can range from about six months to two years. I am seeing anecdotal evidence that the spending is drying up in the NYC economy, as Mayor Adams recent budget cuts indicate.
Tale of Two Governments: NYC & NYS - NYS Governor Hochul has $19 Billion [about 44%] in Unspent CoVid Relief Funding, While NYC Mayor Adams is Making Cuts to the NYC Budget
Many businesses and households didn't spend all of the money they saved during the pandemic, so there's still some of that stimulus that will continue working its way through the economy in the coming year or two. For example, while NYC Mayor Adams is cutting expenses, NYS Governor Hochul has about $19 billion, or 44% of the emergency funding allocations left to spend. Perhaps Hochul and Adams ought to talk about NYC getting a bit of NYS help, given half of the state lives in NYC, and localities received far less aid than the states, likely with the expectation that the states would use the funds to aid the localities.
So in the case of NYC and NYS you have two different viewpoints - one where money is scarce and the other where it isn't ... at least not yet. I say yet, because the MTA is still operating below prepandemic levels. And thus NYS will have to continue making up the short fall. And the NYC cuts to education may need to be offset by an increase in NYS spending on the same.
Demand Side of the Economy - Employment and Businesses & Households Wealth Effect
Businesses and Households balance sheets also improved, in part because of stimulus funds and in part because spending was held back on services, like travel and hospitality, during the pandemic. Spending came roaring back in 2021, as the pandemic began to fade, but in 2022 it has subsided considerably. Most recently, retail sales were down about 1% in December of 2022, so the economy is definitely cooling.
In the top row of the chart at right is Gross Domestic Product [GDP is the total production value of the economy] and Employment, respectively, for 2021, 2022 and estimates for 2023. GDP [top left] softened in the first and second quarters of 2022, but came back in the third quarter, before falling again in the fourth quarter [estimated]. GDP is expected to remain soft in the first part of 2023, before coming back at the end of 2023. Likewise with Employment [top right], which has been softening. The U.S. is expected to lose some jobs in the first couple / three quarters of the year as rising interest rates dampen consumption and business investment.
So far the strong job market, with rising compensation, and up until 2022, a rising stock and housing market, added to Americans' confidence and contributed to robust spending in 2021 [see chart at right].
But as interest rates have risen, job growth has slowed, and layoffs by a number of the nation's largest tech companies [10,000 layoffs expected by Microsoft alone] begin to take root in the Economic Psyche of the American consumer, demand and productivity are expected to fall as noted by the GDP chart above right [top row on the left].
Inflation vs Market Liquidity Risk
Another aspect of the slowing economy is the impact of the Fed policiies in 2022. The Fed rose rates rapidly this past year and they've been taking liquidity out of the market via bond sales - both of which should have begun in the latter half of 2021 [the Fed was slow to react to the data]. And now the Fed is on the verge of causing a recession because it seems they are not taking into account the multiplier effect and the lag time with which it takes for economic policy to work itself through the nation's $25 trillion economy.
I suggest that Fed Chairman Jerome Powell increase the Fed Funds rate by .25% at the next FOMC [Federal Open Market Committee] meeting at the end of January. Not that the economy needs further braking, but rather because the market expects such an increase, and any change either way, might spook them. And then I would signal that the Fed is going to take a wait and see approach, to allow time for what's been done to ripply through the economy.
The Fed was a contributor in part to the inflationary problem we currently have. Although Vladimir Putin and the disruptions caused by the pandemic should be given fair credit too. And the Fed is on the verge of contributing to a recession by overreacting - just as they overreacted at the onset of the pandemic. For my money Powell isn't a steady hand. But if he stops raising rates now, he might avoid overplaying his monetary hand, like he did when the pandemic first hit.
One last word on interest rates and inflation. Inflation ticked up considerably in the first half of 2022, which is why the numbers should begin muting rather quickly in the first half of 2023 - because the prior year numbers [aka the base numbers] are already inflated. See chart below right for a month by month account of inflation last year to see what I mean. The higher 2021 December base is why the December 2022 numbers came in so well versus expectations.
Supply Side Growing to Meet Demand, so Inflation is Subsiding - Oil Supplies are Flowing, China Coming Back on Line, Russian Disruptions Contained & the Federal Government Continues Making Investments
China has rolled back its restrictive CoVid policies. This will increase the supply of semiconductors, which should reduce price pressures in categories such as vehicles and electronics, which account for about 3% of the 8% of inflation we experienced in 2022 [light and dark blues of the chart below right].
The Biden Administration passed a bipartisan Semiconductor bill which is expected to bring more high paying jobs in the semiconductor industry back to the U.S. It will also alleviate the shortage in the long term.
Energy costs, as already mentioned, are primarily related to the rise in oil prices last year, due in great part to Russia's war in the Ukraine as previously shown in the chart above. In the chart below, yellow denotes the contribution of energy costs to inflation, representing between 2% - 3% of the 8% inflation of 2022 in the graph below right.
The Biden Administration reached out to Venezuela, which has the world's largest oil reserves, to provide more oil, which is being done with the help of Chevron.
And food, also experienced inflation due not just to the war in the Ukraine, but also climate change weather disruptions of drought and damaging storms. In the chart below right that's denoted in green and represents about 1% of the inflation last year.
The food category may continue to experience inflationary pressures because of climate change. The Biden Administration passed the Infrastructure Bill and the Inflation Reduction Act, both of which contain provisions designed to address the growing threat of climate change. Here I have to take issue with at least one provision [more later as I think some of this bill was ill-conceived by policy makers], and that is the roll out of electric vehicle recharging stations.
Time to Rethink - Why Don't Car Manufacturers Make Swappable Batteries that Consumers Can Re-Load in Minutes at a Fuel Station Instead of Waiting 20 - 30 Minutes to Re-Charge a Car?
I don't get it. Some of the smartest people on the planet are engineering these new technologies, but for some reason don't seem to be able to see the forest through the trees. The government should mandate that all electic vehicles be required to operate on a standard electric battery signed off on by the industry. The battery should represent an eighth of a tank of gas or equivalent, so that a driver can 'refuel' each time one of those batteries has dropped its load. In this manner drivers don't have to wait to recharge their cars, and the U.S. government doesn't have to install all of this unnecessary infrastructure. Set up the recharging stations near the power plant for greater efficiencies.
Risks - Debt Ceiling Gambit by Kevin McCarthy & The Republicans
Russia / China
Conclusion - It Could be a Good Year if McCarthy, Putin & Powell are Held in Check
Interest Rates / Fed / Housing / Automotive
Almost done. This will be completed at a later date.