Data tokens on this page
Economic Outlook February 2023
Economic Outlook February 2023
ECONOMIC OVERVIEW
After closing the books on a tumultuous 2022, many individuals are likely hoping for a gentler ride in 2023. The combined impacts of surging inflation, geopolitical strife, monetary policy shifts, and slowing consumer activity greatly influenced economic and market results over the course of the year. However, the forces that drove the roller coaster in 2022 have not faded into the rearview mirror. In fact, some may have much more influence to exert on economic results in 2023.
INFLATION
Surging inflation seems to be the trigger point for many of the economic realities over the last year and will continue to guide policy action and economic results in 2023. The U.S. Fed has taken a singular focus to reduce inflation and avoid a 1970’s-esque scenario of stagflation. At the same time, many of the pandemic-induced factors (supply chain issues, housing price increases, and massive monetary and fiscal stimulus) that drove inflation to peak in mid-2022 have been fading from the monthly reports before the lagged Fed actions of mid to late 2022 have seen their full impact felt in economic data. We anticipate that inflation will continue to decline in 2023, initially at a slower rate and then with renewed vigor as influences from housing prices fade further into the background in spring and consumers continue to adjust their activity to higher rates.
In light of the slowing pressure of inflation, the U.S. Fed has already started to downshift their aggressive monetary policy stance early in 2023. The question still remains if they have already done too much, too fast or if their four consecutive 0.75% hikes were the right policy response to create a soft landing. While better than expected economic data early in 2023 may encourage the Fed to reignite their hawkish policies, we believe a “wait and see” approach is more prudent given the pandemic-era influences set to fade in the early part of the year.
EMPLOYMENT MARKET
Employment markets normally react to higher interest rates and slowing consumer activity with falling wages, fewer job openings, and rising levels of unemployment. This cycle, employment markets have not yet reacted to monetary policy in the same way. Yes, the rate of increase in wages has started to subside but unemployment sits at a 53-year low of 3.4% with little signs of rising soon. Declining wage growth and increasing layoffs aside, such a low level of unemployment may be cause for the Fed to continue down its aggressive path for longer as they would view continued robust employment as a sign of economic strength in spite of higher rates.
CONSUMER SENTIMENT
The consumer has been significantly impacted by the run-up in prices and higher borrowing rates with stress showing in consumer activity in the fourth quarter of 2022. Despite a stronger showing for retail sales in early 2023, the combined stresses of higher prices and increased borrowing rates, that appear to be “higher for longer”, do create a real headwind for economic growth. The first revision to Q4 2022 GDP clearly shows this impact with worse than forecast consumer activity taking a full 0.2% out of the revised report. We expect to see a continued fall in consumer activity as the year goes on and further impacts from higher rates further hamper consumption.
THE FED AND MONETARY POLICY
Where does all of this leave us for 2023? We anticipate that the magnitude of Fed policy action to date combined with deflationary impacts from the disappearing impact of pandemic-era influences – supply chains, stimulus, and real estate – will push the economy into a short and shallow recession. The American consumer can only persist at elevated levels of spending for so long, and there is already evidence of increased use of consumer credit, lower levels of consumption, and lower seasonal/weather adjusted consumer activity. To wit, a shallow recession actually aligns with the “soft landing” articulated by several Fed participants, even going back to last year. This could be more of a “job-full” recession than prior recent examples with unemployment rates unlikely to rocket beyond 6% at their worst as segments of the economy still in need of labor are able to snap up those laid off from other segments as we have already seen with recent technology layoffs migrating to health care and financial services jobs. A mild recession would provide the leveling that the Fed has been seeking to bring inflation back near target levels while adjusting the supply-demand imbalances present in many areas, particularly in services.
This economic reset would also help to finally put the pandemic-era behind us and set the stage for America to resume a steady annual pace of growth more consistent with pre-pandemic trends. However, it will do little to fix many of the persistent economic realities that the pandemic has masked since 2020. Those will take the long-run course, articulated by thinkers like F.A. Hayek, or the intervention route, as espoused by John Maynard Keynes and others, to truly solve, but that’s an endeavor for the future, and we still need to navigate a more volatile and difficult year ahead as the economy finds its post-pandemic footing.
Sources: Capital Economics, Department of Labor, Department of Commerce, National Bureau of Economic Research, Morningstar, Ycharts, Institute for Supply Management
Great Lakes Advisors, LLC® (“Great Lakes” or “GLA”) is an investment advisor registered with the Securities and Exchange Commission under the Investment Advisors Act of 1940. Established in 1981, Great Lakes is a subsidiary of Wintrust Financial Corporation and a part of the Wintrust Wealth Management family of companies. On October 1, 2013, majority owned subsidiary Advanced Investment Partners, LLC (“AIP”) became fully-owned and integrated into Great Lakes. Great Lakes is a distinct business unit with distinct investment processes and procedures relating to the management and/or trading of investment portfolios for its clients.
Great Lakes Advisors, LLC claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. Policies for valuing investments, calculating performance, and preparing GIPS Reports are available upon request. A list of composite descriptions is available upon request. Great Lakes Advisors, LLC’s fees are available upon request and may be found in our Form ADV Part 2A. Performance data quoted herein represents past performance. Past performance does not guarantee or indicate future results. Returns and net asset value will fluctuate.
Manager commentary represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results, and is for illustrative purposes only. This information should not be relied upon by the reader as research or investment advice. To determine if this strategy is appropriate and suitable for you, carefully consider the investment objectives, risk factors, and expenses before investing.
The holdings, industry sectors, and asset allocation are presented to illustrate examples of the securities bought and the diversity of areas in which we may invest, and may not be representative of current or future investments. Portfolio holdings subject to change and should not be considered investment advice. The specific securities identified and described do not represent all of the securities purchased, sold or recommended for advisory clients and it should not be assumed that investments in the securities identified and discussed were or will be profitable. To obtain a list of all securities recommended during the past year, contact Great Lakes Advisors, LLC at 312.553.3700. Actual clients’ portfolios may or may not hold the same securities depending on the guidelines, restrictions and other factors of the specific portfolios.
The investment views expressed here are those of Great Lakes Advisors only. Opinions and estimates offered constitute our judgment and, along with other data, are subject to change without prior notice as are statements of financial market trends, which are based on current market conditions. The views expressed are for general information only and are not intended to provide specific advice or recommendations. The information contained herein has been obtained from sources believed to be reliable. GLA does not represent that it is accurate or complete, and it should not be relied on as such. Actual client portfolios may or may not hold the same securities depending on the guidelines, restrictions and other factors for the specific portfolio.
Opinions and comments may not reflect those of Great Lakes Advisors, LLC or its affiliates. Content should not be considered a recommendation or endorsement by Great Lakes for any product, service or strategy specific to any individual investor’s needs. Great Lakes is not responsible for third-party posted content. "Likes", "Favorites", shares, similar functionality or content appearing on third party websites should not be considered an endorsement of Great Lakes’ products or services.
Standard and Poor’s, a division of the McGraw-Hill Companies, Inc., is the owner of the trademarks and copyrights relating to the S&P Index. The product is not sponsored, endorsed, sold or promoted by Standard and Poor’s. Standard and Poor’s makes no representation regarding the advisability of investing in the Product.
The index performance figures are calculated in U.S. dollars and reported on a gross basis. The index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income. Fees, including but not limited to the advisory fee, transaction and custody charges, would reduce the return. Investors cannot invest directly in an index. These indexes are not managed or sold by Great Lakes Advisors. Past performance is not indicative of future results.
