Today’s economic landscape is a complex one, but where will we ultimately end up in 2023? Here are the factors we are considering when determining the 2023 economic outlook: the Consumer Price Index, inflation and recession risk factors, interest rates, the stock market, and current financial events.
Consumer Price Index
The Consumer Price Index (CPI Index) measures the amount of change in prices paid by consumers and is a major factor in gauging economic health. Currently in 2023, the CPI is up 6% to last year and raised even more in February, according to First Trust. The Federal Government typically aims for 2-3% growth to show healthy economic advancement, but anything over that starts to indicate an inflationary environment.
What it Means for You
The rise in the overall CPI is most certainly starting to put a pinch on your finances. Focus on the factors you can control like your personal budget and prioritize your spending in the areas that are most important to you. As the economy works its way to a more stable environment, do what you can to increase your income and reduce unnecessary expenses.
Inflation & Recession Risk
Despite higher CPI numbers, inflation has been cooling for the past eight months and spending patterns are starting to normalize in 2023, according to BlackRock. Although, inflation is cooling, experts believe the U.S. is still at risk for a shallow recession further into the year. A recession is a period of economic decline in the Gross Domestic Product (GDP) for two successive quarters. Currently, the last two quarters have showed slow growth and the first quarter of 2023 has been positive indicating slow strength in 2023. However, First Trust suggests that it is a difficult time to make a forecast, but they believe a recession will appear after government actions wear off.[1]
What it Means for You
Inflation cooling is good news for stock markets as generally lower inflation levels call for a less volatile market, but the threat of a recession could affect investing negatively later in the year. New to investing? Look into stocks or investment vehicles less affected by a volatile market. If you’ve invested for a while, keep in touch with your investment professional for advice through inflationary times.
Federal Interest Rates
Federal interest rates have risen nine times over the past year and have been forecasted to continue to climb slowly. Most recently, the Federal Reserve approved a quarter percentage rate increase to further the rate hikes to lie between 4.75% – 5% in an attempt to slow inflation. The interest rate hikes aren’t ideal for the stock market, but do attempt to slow CPI growth.
What it Means for You
The rise of interest rates makes it more difficult to carry a balance on a credit card, buy a mortgage, and ultimately use credit altogether. It also may affect your investments in an unfavorable way in the short term. Try to deprioritize opening new lines of credit, buying or selling real estate, and if you have any variable rate credit lines, consider prioritizing paying these off.
Stock Market
The stock market is another factor to consider when measuring the state of our current economic situation. After coming off of a tough year last year, dropping 19.4% in 2022, the S&P 500 index is up 4.1% for the year so far. As of Feb. 17, Wall Street’s expectation in S&P’s earnings growth for 2023 is 1.6%. Growth in the stock market is always a positive indicator in overall economic health.
What it Means for You
On the plus side, stock growth overall in 2023 will be a change of pace in comparison to last year, Although, rising Federal Rates and slowing economic growth will have an effect on your investment performance this year. Overall, hold on and prepare for a bumpy ride. Lean on your trusted investment professional to help you make wise decisions and manage risk through the rest of the year.
Current Financial Events
The recent collapse of the Silicon Valley Bank (SVB) is one of the most notable financial events in recent months. The bank faced an influx of withdrawal requests that couldn’t be covered prompting regulators to close the bank. This caused some panic among the banking system altogether and individuals using regional banks were concerned about their accounts. Ultimately, the government released a statement announcing it will make available funding to eligible depository institutions to assure banks have the funds needed to meet needs of depositors.
What it Means for You
These events highlight the complexities of rising rates and inflation on larger banking institutions and the local baking sectors. For now, anxieties around funding local banks have been relieved and individuals can refocus on managing their expenses through an ever-changing economic time.
Ultimately, Q1 in 2023 has yielded cautious optimism with strength in the stock market, continuous reduction of inflation rates, and steady growth in the GDP. Although, experts like First Trust predict some trouble ahead later in 2023 as inflation rates will take time to come down to policy-level targets.
What About the Rest of 2023?
When looking at First Trust’s Year-End 2023 Outlook, it’s clear they outline a few key factors to examine including stock positions, recession status, and the housing market.
First Trust does believe we will enter a recession midway through 2023 due to a tighter government money policy to combat inflation. The forecast also predicts stock values to bottom out the first few months of the anticipated recession then rally toward the end of the year. Ultimately, stock values will end up right around where we are today.
Lastly, the housing market is predicted to decline 5-10% in 2023. Over the past two years, prices rose at a faster rate than rental prices. Housing costs are expected to fall until they are more in line with the rental market. Right now, mortgage rates are high and the demand for buying homes is quite low. First Trust expects housing sales to be weaker in 2023 than the prior year.
What it Means for You
Overall, it appears the economy has some work to do to lower inflation rates. This means the stock market, real estate investments, and your expenses will take a small hit through the end of 2023, but are predicted to even out at the beginning of 2024.
Bankers Life Securities is Here
Manage the financial factors you can control in 2023 with Bakers Life Securities. We are here with you every step of the way. We can help create a financial plan that supports your priorities and goals. Call us at (844) 553-9083 or click here to get started.
[1] First Trust, As these artificial actions wear off, we expect a recession to appear, https://www.ftportfolios.com/ March 2023
