Here is a review of the Ten Economic Questions for 2022
Below are my ten questions for 2023 (I’ve been doing this every year for over a decade!). These are just questions; I’ll follow up with some thoughts on each of these questions.
The purpose of these questions is to provide a framework to think about how the U.S. economy will perform in 2023, and if there are surprises – like in 2020 – to adjust my thinking.
4) Participation Rate: In November 2022, the overall participation rate was at 62.1%, up year-over-year from 61.9% in November 2021, but still below the pre-pandemic level of 63.4%. Long term, the BLS is projecting the overall participation rate will decline to 60.1% by 2031 due to demographics. What will the participation rate be in December 2023?
5) Inflation: Core PCE was up 4.7% YoY through November. This was down from a peak of 5.4% in early 2022. The FOMC is forecasting the YoY change in core PCE will be in the 3.2% to 3.7% range in Q4 2023. Will the core inflation rate decrease in 2023, and what will the YoY core inflation rate be in December 2023?
6) Monetary Policy: In response to the increase in inflation, the FOMC raised the federal funds rate from “0 to 1/4 percent” in January 2022, to “4-1/4 to 4-1/2 percent” in December. A majority of FOMC participants expect three or even four 25 bp rate hikes in 2023. What will the Fed Funds rate be in December 2023?
7) Wage Growth: Wage growth was strong in 2022 (up 5.1% year-over-year as of November). How much will wages increase in 2023?
8) Residential Investment: Residential investment (RI) was a drag on growth in 2022 as the housing market slowed sharply. Through November, starts were down 1.2% year-to-date compared to the same period in 2021. New home sales were down 15.2% year-to-date through November. Note: RI is mostly investment in new single-family structures, multifamily structures, home improvement and commissions on existing home sales. How much will RI change in 2023? How about housing starts and new home sales in 2023?
9) House Prices: It appears house prices – as measured by the national repeat sales index (Case-Shiller, FHFA, and CoreLogic) – will be up around 7% in 2022. What will happen with house prices in 2023?
10) Housing Inventory: Housing inventory decreased sharply during the pandemic to record lows in early 2022. Since then, inventory has increased, but is still well below pre-pandemic levels. Will inventory increase further in 2023?