Romer: What to expect in the economy in 2023
The consensus among economists and experts is that the U.S. will experience a mild but short recession in the middle of 2023 caused by consumer and business spending falling because of rising interest rates. Further contributing to the downturn would be consumers finally exhausting historic savings built up during the COVID-19 pandemic, meaning they would no longer have that source of money to keep spending at pace with inflation. A few things to expect in 2023:
Businesses less likely to pass along price increases to consumers
RSM’s Chief Economist Joe Brusuelas noted that businesses are finding it increasingly difficult to pass along higher prices for their inputs to customers through price increases. This was made clear in the RSM-U.S. Chamber of Commerce U.S. Middle Market Business Index when he shared “perhaps the biggest takeaway from the pricing data is that the ability to pass along price increases to consumers is beginning to ebb. Roughly 53% of respondents noted an increase in prices received, down from 69% in the third quarter.”
How businesses and families will weather the downturn
Although we are likely to have a mild recession, there is always pain caused by a decline in the economy. The common belief is that this will likely be the first recession in memory where there will be no extra assistance, other than automatic stabilizers, from fiscal or monetary policy.
Congress sending recession relief to families and the Federal Reserve loosening monetary policy would both make inflation worse, and hence be self-defeating. Families and businesses will have to weather the economic downturn with the resources already available to them.
Other economic issues bear watching in the year ahead:
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Worker shortages still matter
There is a massive shortage of skilled workers. This, in turn, creates issues for a variety of industries reliant on these skilled trade workers.
We have more than 3.3 million workers missing from the labor force based on labor force participation rates and 4.3 million more job openings than unemployed workers. Businesses are still struggling to get the workers they need, even while inflation receives most of the attention from policymakers.
Consumers are still spending
Consumers still have buying power because wages are rising, albeit less than inflation, but they have savings and available credit to fill the gap. However, those savings are dwindling, and available credit is shrinking, which is why many economists see a recession coming.
Other interesting observations include:
- Consumers are — as expected coming out of the pandemic — shifting their spending from goods to experiences.
- Inflation is driving down how much consumers are buying, but they are spending more in total dollars. For instance, they are buying fewer items when they go to a quick service restaurant, foregoing things like an extra bag of chips or fries, but because of higher prices, they are still spending more per visit than they did before the pandemic.
The bottom line and the good news
The U.S. economy is in for a bumpy 2023. Businesses should be prepared, and as always, also be prepared for those unexpected events that come out of nowhere. The good news is that 2022 ended strong, with growth in the fourth quarter projected to perhaps be over 2%. And the economy is on sound footing once the volatility caused by high inflation ends.
We can expect inflation to come down significantly. The Federal Reserve’s anti-inflationary policies will curb demand and tighten financial conditions enough to start bringing prices down much closer to the Fed’s 2% inflation target throughout 2023.
Chris Romer is president and CEO of Vail Valley Partnership, the regional chamber of commerce. Learn more at VailValleyPartnership.com.