US consumers powered the recovery following the pandemic but high gasoline and energy prices and food and housing costs have eroded their purchasing power. Real consumption spending accelerated to 7.9% in 2021 but may ease to 2% in 2022, and then to 1% in 2023.
There are already signs of an economic slowdown globally; other the other hand, household finances are robust, corporate balance sheets are strong, and the global financial system does not seem particularly vulnerable to asset-price bubbles.
Monetary policy is tightening rapidly around the world and will soon move into restrictive territory, in which rates will be above neutral. Monetary policy works with a lag, and it is likely that the global economy is only now beginning to feel the impact of the rapid rate increases of the past few quarters. Higher rates and tighter financial conditions mean the outlook is increasingly gloomy, with recessions a very real possibility in most major economies.
With inflation still rampant and central banks raising rates aggressively throughout the economy, the odds of a significant economic slowdown have increased. Normally, deteriorating growth would lead policymakers to pivot and stimulate the economy rather than continue to tighten policy. In financial markets, higher interest rates, lower equity prices and wider credit spreads are part of the solution to the inflation problem. Near-term, inflation will remain elevated.
Financial-market turbulence has been a necessary part of the tightening of financial conditions engendered by central banks this year. As policymakers begin to slow the pace of tightening and ultimately pause, the pace of market declines is likely to slow and eventually stop. The most likely outcome for markets is a reduction in volatility rather than a significant change of direction.
High prices plus rising mortgage rates are eroding demand in the housing market. Ultra-low inventories will underpin the sector. Housing starts will decline from 1.56 million in 2022 to 1.25 million in 2023 then hover at this level.
The “jobfull recession” has been fueled by record declines in productivity. Payroll job growth of 3.8% in 2022 will turn negative in 2023 as the “jobfull recession” transitions with job growth falling. Two million job openings will provide a shock absorber for the impact of the recession on the labor market. The headline unemployment rate is expected to rise from 3.8% in 2022 to 6.6% late in 2024 before beginning a gradual decline in 2025.