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  • Shahid Bharucha

US economy January 2023 outlook

The economy remains resilient.



Overview


The United States economy grew much faster than previously estimated in the third quarter, indicating that the Federal Reserve's campaign to tame the economy in order to combat inflation is having only a limited impact. Despite a fast rise in interest rates, the economy is expanding, and, more crucially, individuals are spending. The economy remained resilient due to strong exports and high consumer expenditure. Nonetheless, many economists expect the economy to weaken and perhaps enter recession next year as a result of higher interest rates imposed by the Federal Reserve to combat inflation, which hit levels not seen since the early 1980s earlier this year.



Key details


In the latest scorecard by BEA (Bureau of Economic Analysis), the U.S. economy expanded at an annualized rate of 3.2% quarter in Q3 2022, beating the second estimate of 2.9% and rebounding from two consecutive quarters of contraction. According to the report, the higher-than-expected reading was driven by improvements in exports and consumer spending, which were somewhat offset by a fall in new home spending.


U.S. GDP, Source: Trading economics


Consumer expenditure increased more than expected (2.3% vs. 1.7% in the second estimate) as growth in travel, entertainment, and "other" services offset a fall in spending on products, specifically motor vehicles and food and drinks.


At last, net trade contributed the most to growth (2.86 percentage points vs. 2.93 percentage points in the second estimate), but exports increased somewhat less than reported in the second estimate (14.6% vs. 15.3%), while imports were flat (-7.3%).


Consumer Confidence grew unexpectedly in December. Despite the economic difficulties, consumers remained surprisingly resilient. They continued to spend for much of the year, thanks in part to a healthy labor market, greater levels of savings, and plenty of pent-up demand from the pandemic.


According to data issued by the Conference Board, consumer confidence in the U.S. economy increased in December as high inflation continued to reduce. The newest consumer confidence index from the business think tank showed 108.3 this month, a considerable increase from the previously corrected figure of 101.4 in November. This was due to a drop in inflation expectations as well as recent drops in gasoline prices.


However, those purchasing tendencies appear to be slowing. According to Commerce Department data, U.S. retail sales fell dramatically at the start of the holiday shopping season, falling by 0.6% in November.


Inflation shows signs of easing. The most recent inflation data contained some hopeful news about the consistently high prices that have burdened Americans: Inflation, as measured by the Consumer Price Index, fell significantly in November, reaching its lowest level in a year. According to the Bureau of Labor Statistics, prices grew 7.1% year on year in November, down from 7.7% in October. The year-end core CPI, which excludes volatile food and energy categories, was 6% in November, down from 6.3% in October. Furthermore, the Fed's preferred inflation indicator, the Personal Consumption Expenditures price index, or PCE, climbed 6% year on year in October. This is a decrease from the revised 6.3% yearly growth published in September.


U.S. CPI, Source: Trading economics


Moving on to the job market, while inflation has slowed from its 40 years peak, the labor market has remained robust in the face of high-interest rates. The U.S. economy added 263,000 jobs in November, despite the Federal Reserve's vigorous action to cool the economy and bring down decades-high inflation. According to the Labor Department, the unemployment rate remained stable at 3.7%. Refinitiv polled economists predicted that hiring would drop to 200,000 new positions in November, with the unemployment rate remaining unchanged at 3.7%.


While certain areas of the economy are seeing the consequences of the Fed's activities — home sales have declined, and inflation rates are beginning to slow — the labor market has stayed strong. It is undoubtedly the biggest headwind for the Fed.


In December, the Federal Reserve approved a half-point interest rate increase. A lesser hike than in recent months. This represents a turnaround for the central bank following a historic year in which it raised interest rates seven times in a row as part of an aggressive push to combat the greatest inflation since the early 1980s.


Fed Fund's Rate, Source: Trading economics


While the last hike is less than the four consecutive three-quarter-point hikes agreed upon at the Fed's prior meetings, it is expected to exacerbate the economic agony for millions of American firms and households by increasing the cost of borrowing even higher.


In its Summary of Economic Projections, the dot plot for December indicated federal fund rates climbing to a new high of 5-5.25%, up from 4.5-4.75% in September. In addition, policymakers predicted that the PCE index, the Fed's preferred price gauge, would remain over its 2% objective until at least 2025. Finally, forecasts for the health of the U.S. economy showed that GDP would fall to 0.5% next year, down from 1.2% in September.


In a nutshell, the economy has so far been able to withstand the hikes. The labor market is solid, wages are rising, Americans are spending, and GDP is growing. Economists currently predict 2.4% growth in the current period, which is lower than the previous reading.


Going forward, the main question that remains is how far the Fed would go in its journey of the rate hike. Investors and analysts are concerned that the U.S. economy will enter a recession next year, given the fact that Federal Reserve Chair Jerome Powell stated last month that there is still a chance the U.S. could avoid a recession, but the odds are minimal.



US dollar Index (DXY) and Stock markets


The dollar index has had one of its best years, up more than 8% year to year, as the Federal Reserve was the first among major nations to use aggressive tightening to combat stubbornly high inflation. The Federal Reserve raised its federal fund's rate by 4.25% this year, the largest since 1980, raising borrowing prices to the highest level in 15 years while predicting that rates would need to be raised much further in 2023.


US Dollar Index historical rates. Source: Trading economics


US stocks ended a dismal year on a sour note, with the Dow falling 8.8% in 2022, while the S&P 500 and Nasdaq 100 plunged 19.5% and 33.3%, respectively, marking Wall Street’s worst annual performance since 2008. Governments and central banks grappled with stubbornly high inflation arising from years of loose monetary policy and the fallout from Russia’s war in Ukraine. The sharp declines in global equities worldwide wiped out nearly one-fifth of the capitalization of global stocks, preceding largely pessimistic expectations for next year.


S&P 500 and Dow Jones historical prices. Source: Trading Economics


 

January's Economic Calendar

Tuesday 01/03/2023 – S&P Global Manufacturing PMI(Dec)


Wednesday 01/04/2023 – ISM Manufacturing Employment Index(Dec) | ISM Manufacturing PMI(Dec)


Thursday 01/05/2023 – S&P Global Composite & Services PMI(Dec) | Goods and Services Trade Balance(Nov)


Friday 01/06/2023 – Nonfarm Payrolls(Dec) | Unemployment Rate(Dec) | ISM Services PMI(Dec)


Thursday 01/12/2023 – Consumer Price Index (YoY)(Dec) | Consumer Price Index ex Food & Energy (YoY)(Dec) |


Friday 01/13/2023 – Fed Index of Common Inflation Expectations(Q3)


Tuesday 01/17/2023 – Retail Sales Control Group(Dec)


Wednesday 01/18/2023 – Producer Price Index ex Food & Energy (YoY)(Dec) | Fed's Beige Book


Thursday 01/19/2023 – Building Permits (MoM)(Dec) | Housing Starts (MoM)(Dec) | Philadelphia Fed Manufacturing Survey(Jan)


Monday 01/23/2023 – Chicago Fed National Activity Index (Dec)


Tuesday 01/24/2023 – S&P Global Composite, Manufacturing & Services PMI (Jan)


Thursday 01/26/2023 – Core Personal Consumption Expenditures (QoQ)(Q4) | Durable Goods Orders(Dec) | Gross Domestic Product Annualized(Q4) | Nondefense Capital Goods Orders ex Aircraft(Dec) | Personal Consumption Expenditures Prices (QoQ)(Q4)


Friday 01/27/2023 – Core Personal Consumption Expenditures - Price Index (YoY)(Dec) | Personal Income & Spending (MoM)(Dec) | UoM 5-year Consumer Inflation Expectation(Jan)


Tuesday 01/31/2023 – Housing Price Index (MoM)(Nov) | S&P/Case-Shiller Home Price Indices (YoY)(Nov)





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