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Forecast 2023: Economists Remain Optimistic

Economists remain optimistic that there will not be a recession – while holding their collective breath. © Romolo Tavani –

By: Phillip M. Perry, Contributor

After two years of frenetic activity fueled by a bustling economy, the economy is poised for a breather. A number of headwinds are putting downward pressure on projects and profits, not least of them the broad economic slowdown and the continuing rise in the cost of money. “The underpinnings of industry have been undermined, due in large measure to elevated inflation,” said Anirban Basu, Chairman & CEO of Sage Policy Group (

Missing from the 2023 operating environment will be a number of forces that have benefited manufacturing and construction. They include government stimulus packages, ultra-low interest rates, and rapid increases in the money supply spurred by the Federal Reserve. “All those fundamentals are now being inverted,” noted Basu. “Money is becoming more expensive, and inflation has helped produce much higher materials costs, more expensive workers and pricier equipment.”

Not all is doom and gloom. Some construction segments have a very good five-year outlook, according to Basu, largely because of federal stimulus packages that sent money directly to state and local governments for infrastructure. They include water and sewer, school construction and road and bridge work.

Housing Headwinds

Housing, an important driver of the nation’s economy, has entered a period of correction. “The underlying dynamics of the housing market are changing as lower affordability spurred by higher house prices and mortgage rates is starting to significantly weigh on housing demand,” said Bernard Yaros Jr., Assistant Director and Economist at Moody’s Analytics ( In particular, he noted, a rapid rise in house prices over the past twelve months is discouraging consumers from signing on the bottom line.

Affordability, in fact, has sunk to its lowest level since late 2007, while the 30-year fixed mortgage rate is within striking distance of its highest level in over a decade, leading to a decline in mortgage purchase applications. Meanwhile, the inventory of for-sale homes remains historically low, helping to prop up prices despite flagging demand. Consequently, existing-home sales have dropped over the past five months and are now at their slowest pace since summer 2020. New-home sales have similarly taken it on the chin.

The housing industry’s challenging environment shows up in a softening of numbers in economists’ forecasts. “We expect housing starts to fall by 1.8% and 2% in 2022 and 2023, respectively,” said Yaros. “This compares with a 15.1% increase in 2021. Median prices for existing single-family homes will increase 11.5% in 2022 and fall by 2.6% in 2023. This compares with an 18% increase in 2021.”

One bright spot in the housing picture: the lending environment. “Mortgage credit quality has never been better,” said Yaros. “The percent of loans delinquent and in foreclosure is at a record low. This goes to the stellar underwriting standards since the financial crisis, and borrowers’ credit scores are much higher.” While lending standards for mortgage loans are now tightening, the credit spigot is unlikely to seize up as it did during the financial crisis of 2008.

Larger Picture

The changing environment for manufacturing and construction echoes that of the larger economy, which Moody’s Analytics expects to continue its deceleration over the coming twelve months. The best measurement of such deceleration is Gross Domestic Product (GDP), or the total amount of revenues for the nation’s goods and services. “We project real Gross Domestic Product (GDP) will increase by 0.7% in 2023,” said Yaros. “The expectation for 2022 is 1.7%. (GDP, the total of the nation’s goods and services, is the most commonly accepted measure of economic growth. “Real” GDP adjusts for inflation.)

Both GDP figures represent much slower activity than the 5.9% increase clocked during 2021. The deceleration should affect corporate profits, which Moody’s Analytics anticipates will increase 7.9% and 5.2% in 2022 and 2023, respectively. Those numbers represent a dramatic deceleration from the 25% increase of 2021.

Maybe it’s unwelcome, but an economic deceleration is not a recession, which is loosely defined as an actual long-term decline in GDP. And here economists remain optimistic while holding their collective breath. Moody’s Analytics, for example, figures the odds of a recession are about even through 2023. “The U.S. labor market’s resilience dashes any worry that the economy is in immediate threat of suffering a recession,” said Yaros. “But the nation will enter 2023 being vulnerable to anything else that might go wrong. And it is not hard to imagine that something will.” Potential trouble spots include a spike in the pandemic (most notably in China) and what now seems like a never-ending Russian military assault in Ukraine.

Preparing for 2023

While a continuing worker shortage is a top-of-mind concern for all industries, the tight labor market is also seen as protecting the economy from a free fall. Moody’s Analytics forecasts the unemployment rate will average 4.1% in the final three months of 2023—not far off the 3.7% rate of late 2022. And there is also a feeling that the Federal Reserve will be successful in taming inflation, that is forecast to steadily slow from its 8% level in late 2022 to a pace consistent with the central bank’s 2% target by the end of 2023. Wage growth should also slow to about 3.5% from its current 5% rate.

Despite those positive factors, uncertainty is the name of the game, and that makes corporate planning difficult. “We are faced with a kind of a two-sided coin,” said Tom Palisin, Executive Director of The Manufacturers’ Association, a York, PA-based regional employers’ group with more than 370 member companies. “The positive side represents strong current orders and a continuing need for more workers, while the negative side represents inflationary pressures and global headwinds.”

Which side of the coin will show its face in 2023? Economists advise watching a few key indicators in the early months of the year. “Companies should keep an eye on what is happening with the cost of money,” said Basu. “Rising interest rates cannot be good for business. Second, is there any emerging weakness in the labor market? Finally, any softening of consumer spending would point to a looming recession.” WMHS

Phillip M. Perry is an award-winning freelance writer based in New York City. His byline has appeared over 3,000 times in the nation’s business press. He maintains a website at www.EditorialCalendar.Net.

The Economy Takes a Breather

U.S. Gross Domestic Product (GDP) Annual % Change

2014: 2.3%

2015: 2.7%

2016: 1.7%

2017: 2.2%

2018: 2.9%

2019: 2.3%

2020: -3.4%

2021: 5.9%

2022: 1.7%

2023: 0.7%

Economists expect growth to slow in 2023. Sources: World Bank; projections by Moody’s Analytics.

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