Economic Environment

Written by Philip Rich, Chief Investment Officer,  January 15, 2023.


What to Watch in 2023

This time of year, the financial media are full of forecasts. After allowing for dumb luck, those forecasts are consistently and remarkably fallible. That is not because the commentators are ignorant or trying to mislead us—rather, it is because predicting the behavior of anything as complex as the US economy, let alone the global economy, is virtually impossible. Prediction requires that the multitude of interactions that define an economy be reduced to repeating patterns and mathematical relationships. When such formulas are applied, they often fail due to their inability to detect truly new events (such as war or pandemic) and a more general inability to predict the collective behavior of millions of independent economic agents (consumers, investors, and businesses). This does not mean that forward thinking is completely useless—when exercised with a dose of humility, it can help prepare us for future outcomes, as well as the possibility that we may be wrong. Rather than add to the myriad of fallible forecasts, we will instead suggest some potential developments to watch for in the coming year.

The over-predicted recession of 2023 may, or may not, happen.

  • We enter the year with an economy that is slowing but still growing at a reasonable pace. It would not be surprising to see fourth quarter GDP for 2022 top 3%.

  • Rising interest rates and declining liquidity are applying the brakes to the US economy.

  • Short-term rates have gone from virtually 0% to over 4% in record time.

  • The Fed is draining cash from the economy at a rate of $95 billion every month.

  • A recession seems to be an almost universal consensus; however, a less dire outcome is still possible.

The US economy continues to heal from the serious imbalances caused by COVID and its consequences.

  • Supply constraints caused by lockdowns and travel restrictions are resolving. Throughput at ports and transportation hubs continues to improve.

  • Lower commodity prices and shipping costs are combining to relieve cost pressures on many goods. Overseas shipping prices are below one quarter of their COVID peaks.

  • The availability of chips is improving; some surpluses are reported.

  • Massive fiscal and monetary stimulus in response to COVID stoked demand, and that, combined with supply constraints, fostered record inflation.

  • Higher interest rates and declining liquidity are designed to temper consumption and inflation; however, the US consumer has proven to be surprisingly resilient.

  • Recently, lower savings rates (2.2% in October) and rising debt (credit card debt up 16.9% in November) suggest that the durability of the consumer may be reaching a limit.

The Fed may be forced to pause or pivot.

  • All their public statements insist that rates will remain higher for longer, but convincing the public that they will stay the course is also a tool to combat inflation. Any suggestion to the contrary would be immediately discounted by the markets.

  • Inflation is showing clear signs of a bating. The annualized run rate of the “all items” CPI index for the past three months stands at 1.8%. Much of that is attributable to improving energy prices.

  • By not rolling the proceeds of maturing bonds held on their balance sheet, the Fed is draining large amounts of cash from the financial system.

  • By their own estimates, monetary tightening can impact the economy with a delay of between 18 and 24 months. The strong medicine is just about to hit.

  • Ifinflation and/or the economy slow down sharply in 2023, the Fed may be forced to take its foot off the brake.

  • One uncomfortable scenario: inflation comes down, but not to 2%,while unemployment begins to creep up.

Markets may have discounted higher rates, but what about earnings?

  • Stock declines in 2022 would appear to reflect the higher discount rate attributable to rising rates, but earnings estimates may still be high.

  • A sustainable rise in stock prices requires growth in earnings. Markets may anticipate such an eventual development with some lead time.

  • Recent strength in the dollar has helped moderate the cost of commodities but also dented earnings from overseas operations. A reversal in the dollar could support non-US earnings but also increase the cost of imports.

Wage inflation subject to multiple crosscurrents.

  • Unemployment stands at a record low of 3.5% and has yet to move up in response to monetary tightening. Many employers still report difficulty in filling openings with qualified workers.

  • Wages have been increasing at rates above 4.5%, yet the participation rate remains at a low 62.3%, suggesting a plentiful supply of workers who could re-enter the workforce if motivated to do so.

  • At the same time, the baby boomers have been retiring in droves since COVID, so the supply of experienced workers will be impacted by departures.

  • Workers at the low end of the payscale have benefited the most from wage inflation, which has improved their participation in a consumer economy, provided all the gains are not siphoned off by inflation.

  • Wage inflation will remain a key component of overall inflation, especially in the services sector.

All real estate is local.

  • National figures on housing are reacting to sharp increases in mortgage rates.

  • 30-year mortgages are hovering between 6.5 and 7%, down from their very recent highs but up sharply from their historic lows in 2021.

  • Nationally, existing home sales were down 35.8% YOY in November, and single-family construction was down by a similar amount.

  • However, many high-growth zip codes in the Southeast, Texas, and Arizona have proven more resilient.

  • The real estate market is not nearly as over-heated, or as over-leveraged, as it was in 2008.

Bid farewell to free money.

  • SPACS, IPOs for profitless companies, and cryptocurrencies thrived in an environment defined by excess liquidity, forgivable loans, and ultra- low rates. In an environment of tight money, things like quality earnings, proven assets, and sound management may be more highly valued.

  • For most of this century, stock indexes have generally out performed stock pickers. In a tougher environment, security analysis could make a comeback.

A bull market in pessimism.

  • COVID, partisan divisiveness, and generally weak political leadership have left Americans uncharacteristically pessimistic.

  • Consumer Sentiment measured by the University of Michigan Index recently hit a historic low. Although it has bounced a little since then, it has undercut the low readings of the financial crisis and the late 70s.

  • State coffers and household balance sheets are both in relatively good shape. Employment is remarkably strong. Is it possible we have more in the tank than we appreciate?
  • ​A meaningful part of economic growth stems from people and organizations finding solutions to problems.


America may or may not experience a recession in 2023. Many who are predicting a recession are also predicting that it will be brief and mostly concluded by the end of the year. This year, as in most years, investors will be better served by guidance that centers on their needs, implemented in efficient portfolios that reflect their ability and willingness to assume risk rather than heeding headlines and media-generated predictions.

Please accept our best wishes for a happy and prosperous year!

Never miss an update!

Subscribe to our e-blast series and stay up-to-date with the latest Seaside Wealth Management news. 

Contact our economic experts today.

NoraBagby Image

Nora Bagby

Director Private Banking Sales & Service

BenJohnson, CFA Image

Ben Johnson, CFA

Senior Portfolio Manager and Client Service Manager

LanceHopegill, CFP Image

Lance Hopegill, CFP

Chief Fiduciary Officer

AdamMartin, CFA Image

Adam Martin, CFA

Senior Portfolio Manager

PhilipRich Image

Philip Rich

Chief Investment Officer

GDP – Bureau of Economic Analysis
Employment & Inflation – Bureau of Labor Statistics
Interest Rates – Federal Reserve & US Treasury
P/E S&P 500 –
Market data – Thomson Reuters
This content is provided for educational and informational purposes only as of the date of this writing, without any express or implied warranty of any kind, including warranties of accuracy, completeness, or fitness for any particular purpose. All views and opinions expressed are those of the writer/commentator and do not necessarily reflect the views or positions of United Community Bank or Seaside Bank and Trust. This content is not intended as, and shall not be understood or construed as, financial advice, investment advice, legal advice or any other advice. United Community Bank and Seaside Bank and Trust shall not be liable for any damages of any kind relating to such information not as to the legal, regulatory, financial or tax implications of the matters referred herein. Each person must consider his or her objectives, risk tolerances and level of comfort when making financial decisions and should consult a competent professional advisor prior to making any such decisions.
The report does not provide material information about the business and affairs of United Community Bank or Seaside Bank and Trust. Seaside Bank and Trust is a division of United Community Bank that provides investment, administrative and trustee services to customers of United Community Bank.  Investment and insurance products and services:

  • Are NOT Insured by FDIC or Any Other Government Agency;
  • Are NOT Bank Guaranteed
  • NOT a Deposit or Obligation;
  • Are subject to Risk and May Lose Value