Economic Outlook for 2023: What Do We Need to Prepare for?

By Chris Duderstadt

December 13, 2022

Economic Outlook for 2023: What Do We Need to Prepare for?

Key Points – Economic Outlook for 2023: What Do We Need to Prepare for?

  • Assessing the Impact of Inflation That We’ve Experienced in 2022
  • When Will the Fed Stop Raising Rates?
  • What Does 2023 Have in Store for the Housing Market?
  • Unfortunately, We Don’t Have a Crystal Ball, but Preparation Is Key When Doing an Economic Outlook for 2023
  • 9 Minutes to Read | 17 Minutes to Watch

A Year in Review of 2022 and Economic Outlook for 2023

In our last Modern Wealth Management Educational Series event of 2022, Dean Barber and Bud Kasper look back on the past year and provide an economic outlook for 2023. While they don’t have a crystal ball to predict exactly what the economic outlook will be for 2023, they want you to be prepared for some of the things that could happen.


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Yes, Inflation Is Unpleasant, But You Can Plan for It

No matter what the economic outlook is for 2023, it’s critical that you have a financial plan in place that can bring clarity, confidence, and control to your financial life. As uncertainty continued to build throughout 2022, much of it revolved around rising inflation and rising interest rates.

Well, you may recall earlier this year that we published an article titled, 10 Ways to Fight Inflation in Retirement. Dean mentioned from the get-go in that article that inflation is something that we constantly stress test for when building financial plans. While it had been 40 years since we’ve seen inflation at levels like we’ve seen in 2022, this year proved that only applying a 1% or 2% inflation rate to your plan can be a recipe for disaster.

Federal Reserve Chairman Jerome Powell also said in 2021 that this inflation would be transitory, but that clearly wasn’t the case. That led to the Fed having to raise interest rates faster than at any point in Dean’s 35-year career and Bud’s 39-year career to try to slow inflation.

“That has wreaked havoc on the bond market and the stock market,” Dean said. “And it is beginning to wreak havoc on the economy. It’s already hurting the housing market quite a bit.”

The Big Question Regarding the Economic Outlook for 2023

While 2022 has been a painful year in the markets, there has been some hope for the economic outlook for 2023. On November 30, Powell stated that we could see a 0.5% increase of the Fed funds rate in December. We’ve seen four consecutive 0.75% increases going into the December 13-14 FOMC meeting.

“I think the question is, can the Fed ease up? Can they stop raising rates?” Dean said. “And if so, will they stop raising rates because they’ve put us into a recession and then be forced to start reducing rates? Or are we going to be in this higher interest rate environment for the foreseeable future?”

Why Is the Tech Sector Seeing Job Losses?

Although it sounds very irrational, the Federal Reserve is at the point where it needs to destroy the economy following the substantial rate increases that we’ve experienced. We technically met the criteria for a recession a few months ago after having back-to-back quarters of negative GDP growth. But Bud says there’s more that needs to happen before it can truly feel like a recession.

“We have this weird situation out there where we have so many jobs that are out there and not enough people to be able to fill them. The complication with that is that at some point for this to truly feel like a recession, we need to see job losses,” Bud said. “Now what have we seen recently? We’ve seen technology with significant losses.”

One of the reasons for that is because most of the technology companies are very highly leveraged. That means that they borrow a lot of money to facilitate the growth. Borrowing costs are increasing substantially, so that’s why we’re starting to see the job losses in technology. And as Dean started to touch on earlier with the housing market, we’re seeing a lot of job losses in the mortgage industry as well.

The Baby Boomers Are Retiring in Droves

So, where are the workers to fill all these jobs that are out there? With the way Bud sees it, it’s a two-way street.

The Baby Boomers are retiring at about 10,000 per week. Remember, they’re your most highly qualified, more seasoned workers that companies count on for the success that they’re trying to achieve every year,” Bud said. “When you take that element out of it, you end up with trying to fill jobs with people that don’t have that degree of experience. That many times causes consternation in the success of the company.”

When you have more job openings than you have people that are applying for jobs, that exacerbates the inflation problem because it’s creating something called wage inflation. That is also something that is hurting corporate America today.

“When you see the costs of doing business increasing, when you see the labor costs increasing, what’s that going to do? We’re going to pass that cost along now in the form of higher prices to the average consumer,” Dean said. “It winds up being an extra tax for the consumer. We’re seeing that across most goods and services. Bud is right about the Federal Reserve needing to destroy jobs to bring inflation down.”

How Will the Economic Outlook for 2023 Turn Out?

As Dean and Bud assess the economic outlook for 2023, they have some slightly different thoughts on the first half of next year. Bud believes that once there’s a concrete indication that inflation comes down that the markets will go right back up again. And he thinks that will take place in the first quarter of next year. Dean thinks it will take place in the second quarter.

“I don’t think that we’re going to see a Fed that’s going to be convinced that they can stop raising rates until we get into the second quarter of next year. I think there’s still going to be more pain ahead in the markets,” Dean said. “So, I think we’re going to continue to experience some extreme volatility both on the upside and on the downside. But I don’t think we’re done until mid-year next year, sometime in the second quarter.”

Dean does agree with Bud that once the Fed says that inflation is under control and they’re done raising rates that the markets will take off, whether we’re in a recession or not. Remember that the markets are leading indicators, not lagging indicators. So, Dean believes that the markets will price in a recession. The question is, how long and how deep will be it?

There Is Still Pain Left in Housing

Speaking of leading indicators as we do an economic outlook for 2023, housing is certainly among them. Well, the National Association of Homebuilders/Wells Fargo Index shared that builder confidence in the market of new single-family home builds fell to 49 in August. Any number below 50 is in negative territory, so that generated a lot of buzz about a housing recession.

“Housing is such an important element of our economy. As crazy as it got with home prices and people out bidding each other over the original ask of the owners and everything, we are still about 20% above trend line in home prices,” Bud said. “That tells me that we have some pain to still go in housing to get those prices down to a more reasonable level than they’ve been in prior years. If that happens, that’s going to add to the eventual recovery of that sector of the economy. But in the short-term though, it’s going to be difficult.”

Bringing Back Painful Memories of The Great Recession

In the last few weeks, we’ve seen the 30-year mortgage rate trickle down just a little bit. We started the year at about 3% on the 30-year mortgage. It peaked at a little over 7% and it’s now around 6.5%. Still, you need to go back to before the Great Recession since mortgage have been above 6%.

“Home affordability has dropped substantially. The increase in interest rates for people who need to borrow money to buy a home, which is most people, has caused the cost of home ownership to increase by 80%.”

This, Too, Shall Pass …. But We Need to Be Patient

Again, while the economic we’ve been experiencing is uncomfortable, it isn’t unfamiliar. It’s important to remember that markets are cyclical and that we’ll eventually be back in positive territory. Only time will tell whether that’s in the cards for the economic outlook for 2023.

“I think it’s positive that we have seen the rate that inflation is increasing has started to subside. But I think that we’re going to be in a period where the Fed funds rate is going to be elevated for the foreseeable future,” Dean said. “I don’t believe that we get these few rate hikes out of the way, and then the Fed puts us into recession and all the sudden reverses course and then immediately starts to lower interest rates. One of the things that Jerome Powell has been very clear about is that he would rather go too far than not far enough. With that in mind, it would be highly unlikely that the Fed would pivot and start lowering interest rates just because the economy falls into a recession.”

How Much More Pain Can We Expect?

So, keep in mind that even though Powell hinted at a 0.5% increase of the Fed funds rate in December that we shouldn’t assume that increases in general will stop soon. As Dean said, the Fed doesn’t want to back pedal more than it already has and have that lead to even more pain. Whatever pain we have left to experience is needed in the Fed’s minds in effort to re-regulate the economic. Dean and Bud agree as they do their economic outlook for 2023.

“The big question is how does all this impact the stock market, bond market, real estate market, and energy market across the board? There is no crystal ball, but what we do know is that the markets tend to precede what these events are,” Dean said. “While the market has been super volatile in 2022, we’ve had some amazing bear market rallies of 10% to 20%. Still, we are highly negative on the year across the board.”

What About the Bond Market?

It’s important to understand that on the bond side of things that they’re considered to be stay-rich money. However, that clearly hasn’t been the case during 2022. Bond values have eroded because of the increase in interest rates.

So, there are a few questions to ask about bonds while doing the economic outlook for 2023. One, what bonds do you own? Two, are those bonds just trading back down to par so you’re not going to get that back unless we see a decline in interest rates? Or, three, are your bonds trading below par so that when interest rates subside, those bonds will trade back up toward their par value and then you get the coupon on top of that?

Not all these things are equal. That’s why it’s important for people to understand what they own and how would it react during these different times.

“Bonds have just been in a pitfall,” Bud said. “They’re almost at the same amount of loss as what we’re getting on the stock market. That traditionally doesn’t happen since bonds are supposed to be the safe money.”

The Inverted Yield Curve and Lost Decades

It’s been a long time since we’ve had an inverted yield curve. A 10-year treasury is yielding less than a two-year treasury right now. You can get a 1% better return on the one-year treasury than you can get on the 10-year Treasury. The last time we had an inversion that steep was the early 1970s. Coming out of that, we had the lost decade from 1969 to 1979. The markets were all over the place, but they ended 1979 at about exactly where they started in 1969.

“Back in the 1970s, we had this oil disruption. One of the things they had were odd and even license plates. If your last digit on your license plate was even, you could get gas on Monday, Wednesday, and Friday. If it was odd, it would be the opposite of that. That’s how crazy things got with oil back. We’ve had a similar painful experience for much of this year. It’s a shame that we’re having to go through this because that’s such an important factor in economic growth.”

The Natural Economic Cycles

Once again, though, we need to remember that the economy goes through cycles. When we go through an expansion phase, it typically expands too far. Then, we go through a contraction phase and it’ll contract too much. It would be great if the economy could just do one level and it’s all the same all the time. We get some years like that, but by and large, what we’re going through is normal.

“I’m not saying that you should buy, hold, and hope. I’m saying is patience will prevail,” Dean said. “Yes, we’ve made tons of adjustments to portfolios this year. We’ll continue to make adjustments as necessary. But one of the biggest things that people need to have right now is patience. At the end of the day, the American consumer is still extremely strong and drives 70% of our total GDP.”

Goldilocks and the Three Bears and How It Relates to the Economy

We’re going to close our economic outlook for 2023 by bringing up one of Dean’s favorite market metaphors. It’s the story of Goldilocks and the three bears. We’ve seen the markets get too hot and too cold. In either situation, patience pays off with waiting for them to get just right.

“Hopefully 2023 gives us some brighter numbers with returns in the stock and bond markets,” Dean said. “And hopefully the recession that Bud and I agree is on the way doesn’t become too deep. Ideally, we won’t have too much destruction in jobs, can get to a point where inflation is under control, the Fed can stop raising rates, and people and the markets will gain confidence. When all that happens, you’ll see a recovery and like all recoveries. It’s going to be rapid, so you need to make sure that you’re prepared.”

Planning for 2023 and Beyond

As Dean and Bud said earlier, they wish they had a crystal ball to tell you exactly what’s going to happen with the economic outlook for 2023. What they are sure of is that the foundation of a successful retirement and life from a financial perspective is having a financial plan. That’s one of many reasons why we’ve made our financial planning tool accessible for you to use from the comfort of your own home. You can begin building your plan with the same tool we use with our clients by clicking the “Start Planning” button below.

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While we just looked at an economic outlook for 2023 for this educational series event, a key component of financial planning is for it to be goals-based and forward-looking. Building a financial plan involves looking a much more than 2023. If you really want to see what that looks like for you, you can schedule a 20-minute “ask anything” session or complimentary consultation with one of our CERTIFIED FINANCIAL PLANNER™ Professionals. We can even screen share with you during that meeting so you can understand the ins and outs of our financial planning tool and hopefully see the bigger picture of your retirement. Thanks for joining us, and I hope you have a great rest of your day.

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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.