Everything hinges on inflation
The Fed has a dual mandate to keep the economy at full employment and prices low and stable. While jobs were strong in 2022, inflation has been worryingly high. At the end of 2022, unemployment returned to an impressive pre-COVID low of 3.5%, while inflation remained high but fell to 6.5%. Despite concerns that Fed rate hikes would kill the labor market, the massive number of open, unfilled jobs kept the unemployment rate low and allowed the Fed to raise rates rapidly, pushing inflation lower.
There is hope that inflation will keep falling and may return to 2.5% to 3.5% levels by the end of 2023 or early 2024. Of course, if jobs weaken, the Fed could take a more accommodative policy stance. But no matter what the monthly changes are, unemployment and inflation will continue to set the economic, financial market and monetary policy tone for the rest of the year. We expect inflation to ease significantly further year-on-year, while we also expect the risk that the unemployment rate is likely to rise—but not to a worryingly high level.
Party in the USA
Compared to the rest of the world, the U.S. economy is relatively charmed, despite some additional downside risks. After all, the U.S. produces most of the energy and food we need, to the point where the United States is a significant exporter of food, liquified natural gas (LNG), and petroleum products. Plus, there are still millions more open jobs than workers, and workforce development remains a key phrase on the lips of most executives, industry leaders and policymakers on Capitol Hill.
Sure, crypto imploded. But wasn’t that simply a matter of time? Unfortunately, crypto has not been the sole outlier. For the past six months or so, it seemed like every day, there was some new major layoff announcement, a multi-million-dollar fraud, or a complete eradication of some multibillion-dollar startup. But for all of the job losses and failures in crypto—and even tech, in general—there is still a huge unmet need for workers in commercial freight, the trades and healthcare. Those needs—and the abundance of jobs—highlight a great strength to the U.S. economy, even in the face of higher interest rates and the prospects of negative business investment and slower growth.
There is almost no economy in the world I would rather live in right now than the United States. Europe is still reeling from the Russian war on Ukraine and Asia is trying to resist a pull into a whirlpool of Chinese ambitions for Taiwan that threatens to upend the relative peace and supply chain stability we have known since the end of World War II. Plus, global manufacturing data has conveyed contraction in a number of recent months as the IMF World Economic Outlook reflects expectations of weaker growth in 2023 than in 2022. The only upside is that the economic outlook for 2024 is poised to be more robust than this year.