Will the US economy experience a soft landing or a bumpy ride in Q1 2023?
The answer may depend on how policymakers address four key issues. As well, looking at some forecast and economic figures 🧵👇
1. Critical economic issues
2. Forecasted scenarios
3. Economic sectors
-
Here is a consolidated thread:
1. Critical economic issues
These issues will be significant for the year to come:
▫Labor markets 🟢
▫Interest rates 🟢
▫Debt 🟡
▫Budget bills 🟡
-
▫Labor markets 🟢
Needs to decelerate. Current employment growth(+ve) is unsustainable, which could lead to rapid wage growth and trigger the Fed to raise interest rates, potentially hurting economic growth
-
▫Interest rates 🟢
Though we see that interest rate hikes in 2022 impacted 2023, I don't think we would into recession due to further interest rate hikes.
-
▫Debt 🟡
Congress needs to vote to raise the debt ceiling or the US Treasury may not be able to pay its bills, causing a drop in spending and severe financial market volatility.
-
▫Budget bills
Bills have to be passed for Congress and President to agree on. Failing to do so by October 1 would lead to a decline in government spending.
Thus, causing business uncertainty but not necessarily creating a recession on its own.
-
2. Forecasted scenarios
▫Baseline (60%) 🔴
▫Inflation comes back (10%)
▫The next recession (30%)
-
▫Baseline (60%)
Likely to experience slow growth in 2023, but not a recession.
- Tighter monetary policy, slow global growth, and high energy prices
- Services driven demand may boost household spending.
- Business investment may grow
- Housing market is expected to slump.
-
▫Inflation comes back (10%)
Inflation may return to ~ 6% in 2023
- Wages continue to rise due to the strong labor market, despite the Fed's efforts to slow inflation in 2022.
- Nominal interest rates may also reach high levels, but economy will still remain relatively strong.
-
▫The next recession (30%)
US may experience a recession in 2023 due to the Fed's focus on inflation, failure to reach timely agreements on the debt ceiling and budget.
Possibly seeing a rebound in 2024.
-
3. Economic sectors
▫Consumer spending 🔴
▫Housing 🟢
▫Business investment 🟢
▫Foreign trade 🟡
▫Government policy 🟡
-
▫Consumer spending 🔴
As pandemic ends, people save > spend
People spend less on durables (electronics, cars) thanks services (entertainment, traveling)
The pandemic has also made problems like inequality and retirement issues worse, especially for those with lower incomes.
-
▫Housing 🟢
Construction could recover by mid 2023 and housing to return strong for a while. However, demographics suggest that housing won't be a key driver of economic growth due to slower population growth.
For housing to see faster growth, immigration to spur population growth would be crucial.
Otherwise, the heightened demand for housing during the pandemic is likely to be a short-term phenomenon.
-
▫Business investment 🟢
We see biz ramping up investments but being selective.
- Investment in nonresidential structures grew
- Mining structures took a hit due to the decline in oil prices
- Transportation and IT dominates equipment investment
- Investment in IP increased
-
▫Foreign trade 🟡
The conflict between Russia and Ukraine has created difficulties for US exporters.
Reduced demand from Europe and a stronger dollar due to global uncertainty, are causing short-term challenges.
- Real US exports back to pre pandemic levels
- Real US imports fallen in the last 6 months
- Global exports grew, accelerated by pandemic's effort for globalisation
- US-China trade conflict persists
- Supply chain issues
-
▫Government policy 🟡
The US government's deficit is expected to reach $1.7 trillion by FY27.
- Investors are currently showing no concern about US debt, with low interest rates indicating a desire for more US debt.
- While the US government can continue to borrow at this pace until investors lose confidence, it will eventually face a crisis if it does not find ways to reduce the deficit and borrowing.
-
This ties in well with what Mike shared here:
