One look at the US economy over the past year and the opening lyrics of the classic New Year's tune, "Auld Lang Syne," would certainly come from our lips: "Should auld acquaintance be forgot And never brought to mind?" Indeed, 2022 was quite a year for the textbooks, from soaring inflation to a plummeting stock market. But will 2023 be any different, or will it be more of the same misery, suffering, and unhappiness to which the American people have become accustomed? Let's read our economic tea leaves and find out what the country can anticipate.
Will the Inflation War End in 2023?
In 2020, Liberty Nation nailed inflation expectations when the mainstream media, economists, and Washington rejected its presence. Fast forward to 2023 and the United States is recording modest victories in various inflation battles, but the war will continue to rage on this year.
The consensus on Wall Street is that investors can put a fork in inflation because it is done. The consumer price index peaked at 9.1% in June 2022 and will continue to fall throughout 2023. Of course, the debate is how long it will take until price inflation reaches the Federal Reserve’s intended 2% target, but the CPI and the personal consumption expenditure (PCE) price index are on a downward trend. Several developments have occurred to support this notion: money-supply growth has slowed to pre-pandemic levels, the central bank’s interest rate increases are traveling throughout the economy, demand destruction is taking place, and consumers are shifting their buying patterns.
Does this mean it will be sunshine and lollipops moving forward? Unlikely. Inflation will probably remain a challenge in multiple sectors, especially in food and energy, which might force the Eccles Building to reconsider its 2% goal. This might not happen in 2023, but it may be a discussion.
$100 Oil Again?
In March 2021, Liberty Nation prognosticated that a barrel of crude oil would top $100. About one year later, West Texas Intermediate (WTI) and Brent crude touched the triple-digit mark. After peaking at around $130 this past spring, oil prices erased all their post-war gains and ended 2022 in the $80 range. So, will WTI and Brent contracts reach the promised land again? On the supply front, global energy markets are extremely fragile, with many factors potentially impacting prices: the Organization of the Petroleum Exporting Countries (OPEC) cutting production, Russia removing more oil from the international marketplace, US production remaining relatively subdued, and supplies from Iran and Venezuela still not traveling across the globe. When it comes to demand, there is a lot of hope that China reopening its economy could revive consumption levels, which could offset demand destruction from a worldwide recession.
Still, oil may not average $100, but there is a decent chance it flirts in this area throughout the year, which also means higher gasoline and diesel prices for motorists and businesses. In the end, US crude is more likely to average in the $85 to $90 range.
Bears Versus the Bulls
In the spring of 2021, Liberty Nation discussed signs of an imminent downturn in the financial markets. In January 2022, LN warned that the Nasdaq Composite Index could face a crash. On the final trading session of the year, the tech-heavy index slipped 0.11% and added to its 2022 decline of 33.1%. Indeed, the bears had an enormous feast over the last 12 months. But could the financial markets repeat this abysmal performance in 2023?
The losing streak could continue heading into the first quarter, but the rest of the year might potentially be decent for two reasons. The first is the Federal Reserve. On the one hand, Chair Jerome Powell confirmed that more rate hikes are coming. On the other, the size and speed of these rate increases have peaked, with Powell telling reporters at a recent post-Federal Open Market Committee (FOMC) news conference that the end of the tightening cycle was nigh. This is critical because the equities arena has been built on easy money policies, so any return to a time of lower interest rates is bullish for stocks.
The second is a recession. Since the Second World War, financial markets have tanked heading into a recession. By the time the economic downturn arrives, stocks emerge from the troughs and start heading in an upward direction. Markets are always forward-looking – this was certainly apparent in the early days of the coronavirus pandemic – so traders price in consecutive quarters of negative GDP growth and then look toward better days.
Will 2023 See Another Recession?
The first half of 2022 saw the US economy slip into a brief and minor recession. The consensus on Wall Street is that the nation will witness another period of contraction. But the debate is about how severe that will be. Will the next recession be short and shallow, or on par with the 2008-2009 financial crisis? It depends on who you ask. S&P Global and JPMorgan Chase, for example, forecast a mild recession in early 2023 and a subsequent recovery in the second half. However, the Fed, regional central banks, and government agencies expect muted growth of anywhere between 0.1% and 1% next year. Well, except for Fannie Mae, which is penciling in a modest recession. Or, if you ask billionaire CEO Elon Musk, it will be comparable to the economic collapse more than a decade ago.
Ultimately, it is a case of picking your poison: a recession or a return to the Obama economy.
