Everyone is watching and waiting to see what will happen in 2023. Despite decelerating growth, monetary tightening and economic inflation, healthy consumer and business balance sheets are expected to maintain positive momentum.
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Supply chains
Constraints are easing, even if not completely back to pre-pandemic normal:
Improved delivery times. Key metrics point to significantly improved delivery times. While this could be partly explained by slower order activity—that is, lower demand— the loosening of pandemic-related restrictions in most markets is improving the flow of goods as well
Production levels are improving. Challenges with semiconductor chip availability since mid-2021 have constrained production for a wide range of electronic and automotive products. While not yet fully recovered, production levels have been gradually improving as semiconductor availability and supply chain constraints slowly ease.
Manufacturing sector headwinds are building. Services are still benefiting from normalization.
Experts anticipate real consumption will increase by 1-2% in 2023. Services spending will likely outpace goods spending. Why? Goods spending is generally more sensitive to changes in interest rates and a stronger dollar. Goods consumption also looks due for further reversion given its continued outperformance relative to pre-pandemic norms.
Housing market
Housing market activity is likely to stay low with mortgage rates high:
Rising mortgage rates. Housing experts and economists are not in agreement on how high rates will go but all agree increases are forthcoming. Forecasters predict a wide range of where rates will go in 2023. While Realtor.com anticipates rates for the 30-year, fixed-rate loan will be above 7% in 2023, Zillow projects rates closer to 6% this year, ending the year at between 5.5% and 6%.
Declining home sales. Financial experts, JP Morgan, indicate that total home sales decline by about 10% for each 100bp increase in mortgage rates. Given the roughly 400bp increase in mortgage rates this year, JP Morgan is anticipating another 15-20% decline in home sales from now with construction activity following suit. This would result in residential investment going down 10-12% in 2023.
Low Mortgage purchase and refinance originations. Mortgage purchase originations are projected to be just over $4M in 2023, less than half of recent year totals. Refinance originations for 2023 are also forecasted to be at a historic low—just over one million for the year.
…but home equity originations are expected to increase in 2023:
High interest rates should continue to dampen mortgage purchase originations, projected to be just over four million in 2023. Such originations are projected to be almost half of recent year totals (7.4 million in 2020, 8.0 million in 2021).
Refinance originations for 2023 are forecast at a historical low of just over one million for the year. Tappable home equity is expected to decrease by 6.5% YoY between Q4 2022 to Q4 2023 by $1.3 trillion from $19.4 trillion to $18.1 trillion. This decrease is expected to be a result of a decline in home prices in conjunction with falling balances due to pay down rates.
At the same time, despite the anticipated decrease, the amount of available equity that homeowners have in their homes will remain sizable. Home equity originations are therefore expected to increase by 24% in 2023. As tappable home equity grew to record highs of nearly twenty trillion dollars in 2022, a dramatic increase in homeowners took advantage of this and this trend is expected to continue into 2023.
Labor markets
The labor market is strong, but fragmented:
Job quality is deteriorating. Technology, finance and manufacturing firms are laying off workers, while lower-paying industries like leisure and hospitality continue to add jobs. Major employers are starting to slash costs, which slows down the wage growth that has been fueling inflation. This is good news for the Federal Reserve as they aim to tame rising prices.
Strong labor demand. There are signs that point to strong labor demand, such as elevated job openings (10.7 million in September 2022), an elevated “quit rate” of 2.9% and strong wage growth of 5-6%.
Underwhelming labor force participation. Year-to-date, labor force participation has held at 62.1%-62.4%. That’s below the February 2020 number of 63.4%. It’s unlikely that older workers who retired during the pandemic will reenter the workforce, but a growth in the foreign-born workforce has resumed after declines in 2020-21. Additionally, economists are watching to see if the end of student loan payment deferrals in January could encourage younger workers to reenter the labor force in 2023.
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Consumer credit
Consumers are entering 2023 on solid financial footing, but with less cushion than in 2022.
Excess savings and liquidity depleted. Household balance sheets still look healthy at the beginning of 2023, though a portion of the excess savings and liquidity built up during 2020-21 was depleted over the course of 2022. Consumers have dipped into savings accumulated during the pandemic and have bought more on credit cards.
Slowdown in credit card originations in 2023. Compared to last year, tighter lending underwriting standards are expected in anticipation of a potential economic downturn and higher consumer debt. Originations expected to drop 7.6% from 2022 numbers.
Overall credit card originations are still above pre-pandemic levels. The credit card industry has seen strong growth in originations since 2019. In 2023, TransUnion expects 14 million more credit cards to be issued compared to 2019, which was a strong year for the consumer credit market.
Card delinquency expected to increase. Card delinquency, which was on the rise in 2022, is expected to increase to 2.6% through the end of 2023. That would represent a 20.3% increase YoY.
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Inflation
Inflation is set to fall quickly from peak, but will remain above the Fed’s 2% target at the end of 2023.
Entrenched inflation pressures may require higher interest rates in 2023. At the start of 2022, the inflation conversation was centered on whether a rise in prices would prove to be "transitory." It was a definitive answer: Inflation was not transitory. So in 2023, conversations now focus on how entrenched inflation pressures have become and how far the Federal Reserve may need to go to cut them off. Economists and business leaders are voicing concerns that the year could be a difficult one, noting the Federal Reserve may need to raise interest rates to 6%. That said, they recognize that solid consumer spending is helping drive a strong economy.
Moderation is already underway and this cooling will become more prominent over time.
Supply chain bottlenecks have eased which should lower pent up demand. Pandemic-related distortions, including supply chain bottlenecks, have eased. A surge in pent-up demand, initially for goods and more recently for services like travel, should fade. Energy prices are 20-30% off the summer highs, and new and used vehicle prices have declined.
Lower wage growth expected. Tighter monetary policy has caused significant U.S. dollar appreciation and higher mortgage rates. Expected higher interest rates will soften demand into 2023, and the now-tight labor market is expected to loosen, which should translate into lower wage growth. Labor market conditions will drive inflation both in the near and long term.
Sources:
https://www.goldmansachs.com/insights/pages/outlook-2023-us-expected-to-escape-recession.html
https://www.bloomberg.com/graphics/2023-investment-outlooks/
https://hbr.org/2022/12/what-will-the-global-economy-look-like-in-2023
https://www.morganstanley.com/ideas/global-macro-economy-outlook-2023
https://news.yahoo.com/inflation-will-surprise-investors-again-in-2023-morning-brief-100507316.html
(JPMorgan) (TransUnion)
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