by Calculated Risk on 1/13/2023 02:08:00 PM
Earlier I posted some questions on my blog for next year: Ten Economic Questions for 2023. Some of these questions concern real estate (inventory, house prices, housing starts, new home sales), and I’ll post thoughts on those in the newsletter (others like GDP and employment will be on this blog).
I’m adding some thoughts, and maybe some predictions for each question.
1) Economic growth: Economic growth was probably close to 1% in 2022 as the economy slowed following the economic rebound in 2021. The FOMC is expecting growth of just 0.4% to 1.0% Q4-over-Q4 in 2023. How much will the economy grow in 2023? Will there be a recession in 2023?
The yield curve has now inverted for a ninth time since 1968. Does it spell doom? I am not so sure.
These circumstances raise the possibility of dodging the bullet. Ideally, we avoid the hard-landing recession and realize slow growth or minor negative growth. If a recession arrives, it will be mild.
The major wildcard is the Fed, who was late in raising rates. The Fed cannot err twice by overshooting-i.e., continuing to increase rates well beyond when they should have stopped. I believe the time to end the tightening is now.
One of my favorite models for business cycle forecasting uses new home sales (also housing starts and residential investment). The purpose of the mext graph is to show that these three indicators generally reach peaks and troughs together. Note that Residential Investment is quarterly and single-family starts and new home sales are monthly.The arrows point to some of the earlier peaks and troughs for these three measures – and the most recent peak.
New home sales and single-family starts turned down last year, but that was partly due to the huge surge in sales during the pandemic – and then rebounded somewhat. Now both new home sales and single-family starts have turned down in response to higher mortgage rates. Residential investment has also peaked.
This third graph shows the YoY change in New Home Sales from the Census Bureau. Currently new home sales (based on 3-month average) are down 18% year-over-year.
Here is a table of the annual change in real GDP since 2005. Prior to the pandemic, economic activity was mostly in the 2% range since 2010. Given current demographics, that is about what we’d expect: See: 2% is the new 4%..
Note: This table includes both annual change and q4 over the previous q4 (two slightly different measures). For 2022, I used a 2.6% annual growth rate in Q4 2022 (this gives -2.2% Q4 over Q4 or -3.4% real annual growth). This is based on Goldman Sachs estimate: “We left our Q4 GDP tracking estimate unchanged at +2.6% (qoq ar).”
Real GDP GrowthYearAnnual
GDPQ4 / Q420053.5%3.0%20062.8%2.6%20072.0%2.2%20080.1%-2.5%2009-2.6%0.1%20102.7%2.8%20111.5%1.5%20122.3%1.6%20131.8%2.5%20142.3%2.6%20152.7%1.9%20161.7%2.0%20172.2%2.8%20182.9%2.3%20192.3%2.6%2020-2.8%-1.5%20215.9%5.7%202212.0%0.9%1 2022 estimate based on 2.6% Q4 SAAR
annualized real growth rate.My sense is growth will stay sluggish in 2023, but the economy will avoid recession. Although monetary policy is restrictive, the fiscal policy drag is probably over. Vehicle sales will probably pick up in 2023, but housing will stay low.
Here are the Ten Economic Questions for 2023 and a few predictions:
o Question #1 for 2023: How much will the economy grow in 2023? Will there be a recession in 2023?
o Question #2 for 2023: How much will job growth slow in 2023? Or will the economy lose jobs?
o Question #3 for 2023: What will the unemployment rate be in December 2023?
o Question #4 for 2023: What will the participation rate be in December 2023?
o Question #5 for 2023: What will the YoY core inflation rate be in December 2023?
o Question #6 for 2023: What will the Fed Funds rate be in December 2023?
o Question #7 for 2023: How much will wages increase in 2023?
o Question #8 for 2023: How much will Residential investment change in 2023? How about housing starts and new home sales in 2023?
o Question #9 for 2023: What will happen with house prices in 2023?
o Question #10 for 2023: Will inventory increase further in 2023?