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The most important economic questions of 2023

Bank of America economist: 2023 could be "difficult"
Bank of America chief economist says 2023 "could be a difficult year" 07:24

American consumers, bruised by a grueling 2022, face another year of living dangerously.

Optimists and pessimists alike can point to their preferred indicators to predict how the year ahead is likely to go. In one corner, a recession looks probable this year. The Federal Reserve is also virtually certain to keep hiking interest rates, and wages continue to lag inflation. In the other are clear signs that last year's red-hot inflation is cooling, while the labor market keeps churning out jobs.

"Year-over-year inflation is continuing to fall and gasoline prices have returned to reasonable levels," David Kelly, chief global strategist at JPMorgan Funds, said in an email making the case for a brighter outlook. "The country is showing continued signs of moving on beyond the pandemic and, hopefully, both the bond market and stock market should do better in 2023 than in 2022."

With that in mind, here are biggest questions facing the U.S. economy in the year ahead.

Will the U.S. enter a recession?

The economy will almost certainly slow, with one survey from the Conference Board calling a recession a near certainty. Yet most economists don't expect it to crash. 

The signals flashing red are plentiful. The number of workers claiming jobless assistance has risen to their highest levels in a year. Interest rates on short-term Treasury bills have been higher than long-term interest rates since late last year — a condition known as an "inverted yield curve" that is a reliable predictor of recession. The Fed itself predicts anemic economic growth and a spike in the unemployment rate next year.

Any downturn is likely to be modest, according to many economists. Given how much trouble employers have had hiring during the pandemic recovery, most will be loath to lay off workers. And consumers are still in relatively good shape, having built up savings during the pandemic.

JPMorgan Chase CEO Jamie Dimon warns of "mild recession" in 2023 05:30

Will inflation subside? 

The worst inflation in 40 years has eased since peaking in the summer, with prices in December increasing about 6.5% from a year ago, according to estimates from economists surveyed by FactSet. 

"The evidence suggests we're already past peak inflation. So the year-on-year rate of inflation should start to move lower," Michael Gapen, chief economist at Bank of America, told "Face the Nation" this week. 

However, he added, "It will probably take two to three years to get inflation back down to levels that we knew prior to the pandemic — in other words, low, stable and something we didn't necessarily talk about."  

The good news is that many of the factors driving inflation higher have receded: Global supply chains are unsnarling, rents are falling and surveys show consumers are spending less than a year ago. 

Still, at an annual rate of 6% inflation is triple the Fed's preferred target of 2% per year. Having been burned by declaring price hikes "temporary" last year, the central bank will be leery of declaring inflation dead too soon and could continue to hike interest rates until the U.S. is well into a recession.

Fiona Greig, global head of investor research and policy at Vanguard, sees the economy at a turning point. 

"We've seen a cresting of the potential inflation measures, maybe a cresting of the hotness of the labor market," she said. "The question is, do we land softly, do we plummet quickly? Obviously, the Fed's policy actions play a role here."

Will gas prices spike again?

There's good news on this front, too. Gasoline prices are unlikely to return to last summer's record high, according to Patrick DeHaan, head of petroleum analysis at GasBuddy.

"I don't think Americans will have to dig as deep into their wallets this year to fill their tank. Most, if not all of the country will be able to avoid record-setting prices this year," DeHaan said. He predicts that national average gas prices this year across most of the U.S. will hover between $3 and $4 for a gallon of regular.

The chief factor restraining fuel prices is increased refining capacity in Texas, Nigeria, the Middle East and Asia. Closures of refineries, which turn crude oil into finished products including gas, diesel and jet fuel, were a major reason prices sure after COVID-19 exploded in 2020.

"COVID shut down refineries for months and months — some didn't come back online until this summer," DeHaan said. 

The biggest question mark for gas prices is Russia's war in Ukraine, as well as the outcome of China's reopening as its COVID-19 cases increase. Changes in either area could dramatically reduce global oil supplies, which would likely drive up fuel prices.

"The EU continues to sanction Russia, and Russia has promised to respond to price caps. Ten months into this, there's still a level of stability even though that's not the ideal outcome," DeHaan said. "To lose [Russia's] output would be a big hit to the global economy at the time it's still recovering from COVID."

MoneyWatch: Financial predictions for 2023 04:45

How safe is your job?

While the Fed has made weakening the job market a key pillar of its inflation-fighting strategy, the hit to employment this time around is likely to steer clear of the worst-case scenarios. 

"Laying off people is a pretty dramatic move in light of the labor shortages we've been dealing with," said Vanguard's Greig. "There may be other cost measures that companies think about. Meaning, maybe they slow hiring rather than laying people off, maybe year-end compensation this year was more tepid than typical years."

Most economists expect the nation's unemployment rate to top out at between 5% and 6% — equivalent to another 3.5 million Americans losing their jobs. The pain will likely be concentrated in a few industries, including the interest-rate-sensitive housing sector and technology, which has seen large-scale layoffs.

Industries where hiring has exceeded the pre-pandemic trend, including retail, professional and business services, manufacturing, and transportation and warehousing, are also in danger of cutbacks, Deutsche Bank predicted. On the other hand, the still-understaffed areas of local government, health care and leisure and hospitality are collectively short 4 million workers, meaning they could continue to drive employment growth as hiring elsewhere slows. 

Will you get a raise? 

Worker wages have trailed the rate of inflation for more than a year, and employees are eager to catch up. 

The signs on this front are mixed. Some government data shows that worker raises, which accelerated in the first half of 2022, have slowed. But people's expectations for higher pay haven't, with the amount of money Americans say they need to switch jobs recently hitting a record high. 

And there's one method of getting a raise to stay ahead of inflation: switching jobs. Wages for job-switchers are growing by over 8% per year, exceeding the rise in consumer prices, according to the Federal Reserve Bank of Atlanta.

"There are many jobs if one wants to be employed. That's a good thing for the American worker," said Greig.

Why some employers are offering their largest raises in decades 05:14

When will the stock market recover?

The S&P 500 lost nearly 20% of its value in 2022 and wiped out trillions in Americans' wealth. But a similar plunge is unlikely this year, Wall Street analysts said.

In the past 70 years, there have been only three instances in which the S&P 500 ended a year in the red and then went on to fall the following year: in 1973, 2000, and 2001, according to investment firm LPL Financial.

"Through many economic downturns, recessions and geopolitical crises over many decades, the stock market has always recovered. Those patient and courageous investors who were able to take advantage of those declines have usually been rewarded nicely," LPL analysts said in a research note.

The big question for investors is when. Most believe that when the Fed signals an end to interest-rate hikes, stock will rally. But that may not happen until the end of the year, or even until 2024. In the meantime, financial pros point out that low stock prices often present a good buying opportunity.

"Keep a long-term perspective — don't worry too much about asset prices being low," Greig said. "Markets are volatile and that's why a diversified approach, and simply staying the course, tends to perform pretty well."

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