What does 2023 hold for the U.S. economy?

Editor's note: This is an excerpt from the recently released 2023 Greater Oklahoma City Economic Outlook. 

READ THE FULL 2023 GREATER OKLAHOMA CITY OUTLOOK 

READ the 2023 Greater Oklahoma City Outlook Overview

Look back at 2022's biggest relocations and expansions

U.S. Economic Outlook

A recent Wall Street Journal survey of 23 large financial institutions found all but a handful expect a recession in 2023. Both savings and labor market strengths are expected to buckle under the pressure of tightening monetary policy and the Fed’s inflation fight in the coming year. In the outlook graphics below, we present two independent, third-party perspectives on the year ahead. The first is the summary outlook published by The Conference Board and the second is the median forecast of professional forecasters surveyed by the National Association for Business Economics. For each graphic, we present each forecast and offer commentary when our expectations differ from that of these bodies.

Note that the Conference Board and NABE outlooks anticipate only modest increases in the unemployment rate even as they anticipate economic growth to be absent through the next year. We agree that unemployment rates won’t rise as much as expected in a recession, but that doesn’t mean the labor market won’t feel the effects of an economic slowdown.

We anticipate the unemployment rate rising closer to 5% or higher next year as layoffs pick up, openings come down, and employers assess the economic environment before committing to labor additions. Policymakers long hoped that inflation would prove to be the temporary and transitory influence of supply chain disruptions and pandemic dislocations. Inflation, however, was persistent and likely fueled by successive rounds of trillion-dollar pandemic relief economic policies, chain disruptions and pandemic dislocations.

Core inflation (excluding food and energy) is moderating but remains well above the Fed’s 2% target. Inflation, as measured year-over-year, will remain above this policy target through 2023. We expect at least 75 basis points of rate increases in the first half of 2023 before policymakers pause to see the lagged effects of policy on economic activity.

The bond market is sending signals contrary to the Fed. The bond market is signaling expectations that the Fed will abandon course when the economy slows and pivot hard-to-rate cuts in the second half of 2023.

The Fed is talking about staying the course, holding rates high enough for long enough, and enduring the pain of transitioning back to its 2% inflation target. We think it’s wise to listen to Fed signals. We do not expect an aggressive policy pivot. Further, we believe we are at the early stages of a policy regime change away from the decade-plus of ultra-accommodative monetary policy, with a shift away from aggressively using the balance sheet to constrain long-run yields and subsidize risk.