2023 Economic Forecast
Looking back on the past few years, uncertainty has been a common theme, and the economic forecast for 2023 is unlikely to change this theme.
Between an ebbing and flowing pandemic, inflation, rising interest rates, and talk of a potential recession, many investors feel as though they've been buffeted by forces beyond their control in recent years
While planning for the future with certainty is enticing, nobody has a crystal ball to see what the next few months hold. Still, it can be helpful to take a comprehensive look at where the economy stands now and hear long-term predictions from experts about where we could be headed.
The inflation outlook for 2023
The U.S. inflation rate was 7.1% as of November 2022.1 While that's down from 2022's high of 9.06% in June, it's still quite a bit higher than the Federal Reserve's target of 2%,2 which is measured by the annual change in the price index for personal consumption expenditures (PCE).
What can we expect for 2023? Many experts believe the worst inflation is behind us — at least for now.
While consumers saw prices climb across the board in 2022,3 Preston Caldwell, head of U.S. economics for Morningstar Research Services, noted that the energy and auto industries were primary inflation drivers. He anticipates supply constraints impacting these industries — such as the semiconductor shortage — to resolve in 2023 and for inflation to average just 1.7% from 2023 to 2026.4
The latest survey of Professional Forecasters for the fourth quarter of 2022 shares that view, projecting headline PCE inflation will drop to 2.9% in the first quarter of 2023.5
Will interest rates continue to rise in 2023?
Interest rates and inflation tend to move in the same direction. That's because when inflation increases faster than the Federal Reserve thinks is good for the economy, it increases rates to encourage people to buy less, which helps bring inflation down.6
If inflation eases in 2023, will we also see interest rates fall?
Many experts expect more rate hikes on the horizon.
"During December's meeting, the Federal Open Market Committee raised its benchmark rate by 50 basis points to a 4.25% to 4.5% target range," says Daniel Morgan, Senior Trust Portfolio Manager at Synovus Trust Company. "Policymakers are now projecting rates would end next year at 5.1%, according to their median forecast, before being cut to 4.1% in 2024—a higher level than previously indicated."7
Whether a recession happens in 2023 or not, recessions are part of regular economic cycles, and they do eventually pass.
What to expect from the financial markets in 2023
The past year was tough for the stock market due to rising interest rates, economic worries, the war in Ukraine, and inflation.8 But can investors expect a rally in 2023?
If inflation declines and interest rates remain relatively high, investors might be able to put the worst of market volatility behind them.
When interest rates were close to zero, investors didn't have many alternatives — they could either put their money in stocks or earn next to nothing from cash and bonds.
"Now, the risk-free rate of return on CDs and T-bills within 12 months are paying over 4.5%,"9 says Christopher Brown, Financial Advisor with Synovus Securities, Inc. "Stocks now have to compete with 4%+ risk-free U.S. T-Bills or FDIC-insured CDs. This may provide some hesitation for wealthy investors with large cash positions, who are near or in retirement, to reassess their options and allocation percentages into the stock market. I remain cautiously optimistic for stocks going into 2023."
Will there be a recession in 2023?
The possibility of a recession in 2023 remains up for debate. On the one hand, Goldman Sachs Economic Research predicts that the U.S. will narrowly avoid a recession10 with slowing inflation and a slight increase in the unemployment rate.
On the other hand, a survey of 38 economists conducted by Bloomberg gave the U.S. a 70% chance of entering a recession in 2023.11
Whether a recession happens in 2023 or beyond — and whether it's short and shallow or long and deep — recessions are part of regular economic cycles, and they do eventually pass.
Still, recession talk can be unnerving. To ease those fears, Brown offered investment advice12 that applies whether a recession is coming in 2023 or not:
- Define your investment goals and objectives.
"Having a good understanding of your investment goals can provide a framework around what type of investments are appropriate for your long-term financial needs," Brown said.
- Know your time horizon for your investments.
According to Brown, "Time horizon can help define what type of investments you want to own and the volatility you are willing to accept for your long-term investment plans."
- Know your risk tolerance.
"If you don't have the intestinal fortitude to handle the ups and downs of the markets, finding investments with a defined maturity date, buffered downside investment strategies, or principal-protected investments may help you stay invested without realizing the full brunt of a bear market cycle," Brown said.
Ultimately, it is impossible to predict how the economy will fare in 2023 or beyond. But by understanding current economic trends and projections, investors can better understand the key factors that may shape their investment decisions over the coming months and years. Talk to your Synovus financial advisor for help making informed decisions about how you manage your investments and work toward your financial goals.
Important disclosure information
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
- RateInflation.com, “American Inflation Rate," updated December 13, 2022, accessed December 21, 2022. Back
- Board of Governors of the Federal Reserve System, “Why does the Federal Reserve aim for inflation of 2 percent over the longer run?" updated August 27, 2020, accessed December 21, 2022. Back
- Jeff Cox, “Inflation isn't just about fuel costs anymore, as price increases broaden across the economy," CBNC, updated September 14, 2022, accessed December 21, 2022. Back
- Preston Caldwell, “Why We Expect Inflation to Fall in 2023," published November 10, 2022, accessed December 21, 2022. Back
- Federal Reserve Bank of Philadelphia, “Fourth Quarter 2022 Survey of Professional Forecasters," published November 14, 2022, accessed December 21, 2022. Back
- Federal Reserve Bank of Cleveland, “Why Does the Fed Care about Inflation?" accessed December 21, 2022. Back
- Daniel Morgan, “Fed Raises Rates Again in December," Synovus, published January 2023. Back
- Lewis Krauskopf, “Explainer: Why the U.S. stock market is tumbling in 2022," Reuters, published May 11, 2022, accessed December 21, 2022. Back
- Christopher Brown, "December Market Update: A Santa Claus rally forstocks or just a lump of further losses?" Synovus, published December 8, 2022, accessed December 21, 2022. Back
- Goldman Sachs Economic Research, “Macro Outlook 2023: This Cycle Is Different," published November 16, 2022, accessed December 21, 2022. Back
- Vince Golle and Kyungjin Yoo, “Economists Place 70% Chance for U.S. Recession in 2023," published December 20, 2022, accessed December 21, 2022. Back
- Christopher Brown, “Millennial Money: Your first Bear Market…what's next?" Synovus, published October 7, 2022, accessed December 21, 2022. Back
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