How's the Economy Doing in Early 2023?

Are we in a recession? What’s next? Where are we headed?

These are all questions that many people have right now, but the truth is - It’s complicated.

It’s understandable to feel uneasy and have questions during a time like this. Unfortunately, none of us have a crystal ball that can predict what is going to happen next. All we can do is look at the facts and look at history to make educated predictions.

After the Federal Reserve hiked interest rates again (but less than last time) and all the market volatility, it's a good time to talk about the economy.¹ I will go over some of the things currently happening and also a look at key indicators of economic performance.

Inflation has been falling since Summer.

Inflation fell for the sixth straight month in December, bolstering evidence that it may have peaked last June at 9.1%.²

However, inflation is still very high, very real, and its impact is being felt across the economy.

The jobs market is still very strong.

The latest January jobs report came in ahead of the data that Fed economists expected. The economy added over 500,000 new jobs and the unemployment rate fell to the lowest level since 1969.³ Now is this true growth, or people actually finally returning to work post-Covid?

You can see in the chart above that most industries are still actively hiring, suggesting that Fed actions still haven't slowed the desire for workers.⁴

The economy shrugged off recession worries in Q4, for now.

Despite predictions of a recession, the economy grew 2.9% in the last three months of 2022.⁵

However, consumer spending weakened slightly, indicating that Americans might be trimming expenses. Since consumer spending accounts for 70% of economic growth in the U.S., it could be a potential warning sign of weakness yet to come.

A few takeaways about the current state of the economy.

But, before I dive into them, I want to point out two important caveats about economic data:

Much of the initial data we see in the headlines is based on incomplete estimates that are revised later as more data is processed. These big data bureaus try to balance releasing data quickly enough to be useful and getting the complete picture.
Data is often impacted by seasonal trends that can cause spikes or "noise" in the data. That's why we look for trends rather than single data points.

Here's what I see:

Despite tech layoffs and gloomy headlines, many sectors seem to still be going strong, job-wise.

Interest rate hikes aren't slowing down growth as much as the Fed hoped, though inflation is showing a downward trend.

While recession fears are real and based on solid concerns, it doesn't look like the economy has hit the skids yet.

What does all this mean for future Fed interest rate moves?

That's the trillion-dollar question, isn't it?

It's possible that more interest rate hikes are coming. I think folks expecting a quick pivot away from increases are going to be disappointed.

But any future rate hikes may be smaller and slower paced as the Fed takes stock of what the data is showing and works to keep us out of a recession.

Federal Reserve chair Jerome Powell has admitted that inflation has begun to fall but he wants to see "substantially more evidence" of a declining trend before changing policy.¹

With inflation still three times above the Fed's 2% target, there's still a long way to go before we're out of the woods and back on the path.²

What could happen with markets?

I expect a lot of volatility ahead as markets digest every shred of information about the economy and the direction of interest rate policy.

The most important thing to remember is the importance of having a financial plan and sticking to it. If you want to learn more about what a financial plan consists of, give us a call at the office and we would love to help!

Sources:

The opinions expressed herein are not meant to provide specific investment advice or serve as a prediction for future stock market performance We recommend everyone consult with a financial professional for advice related to their own, individual financial situation or plan.

Daniel S. Miller, Kaleb Robuck, and Marcus Taylor are investment adviser representatives of, and securities and advisory services are offered through, USA Financial Securities Corp. (Member FINRA/SIPC). USA Financial Securities is a registered investment adviser located at 6020 E Fulton St., Ada, MI 49301. Milestone Financial Group is not affiliated with USA Financial Securities.