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It was the best of times, it was the worst of times.
Charles Dickens used this phrase to describe 18th century London in the opening to A Tale of Two Cities, but it could easily be used to describe today’s economy. Depending on who you ask, we are all going to be fine, or we could be sleepwalking into a massive recession the likes of which we have never seen before.
Predicting the future direction of the economy has never been an exact science, but I’ve never seen a year like 2022.
Remember in January, when the big debate on Wall Street was the size and scope of the inevitable “recovery rally” that would happen as world economies opened back up? Borders were reopening, airlines were starting to fly again, and we were excitedly awaiting the start of our generation’s own version of the Roaring 20’s. We had so much hope for the future.
Then supply chain issues got in the way. Then inflation. And then, oh yeah, Vladamir Putin invaded Ukraine for no good reason, sparking the largest armed conflict and humanitarian crisis on the European continent since 1939.
Well, 2022, nobody can ever accuse you of being boring.
So now we have multiple major geopolitical and economic events happening. Some are good (like the return of open borders) and some are really bad (like the war in Ukraine). What’s interesting about this year is that all these events are happening at the same time, and as a result the normal economic indicators we use to figure out the future direction of the economy are all confused and pointing in different directions.
What indicators, you ask? Well…
The Stock Market
So when are the Roaring 20’s supposed to start again?
Instead of 2022 delivering what was supposed to be a massive relief rally as COVID-19 slid into our collective rear view mirrors, this year’s global stock market performance can best be described as a shit sandwich (I believe that’s the technical term).
As of the time of this writing, the US stock markets are down 20%. International markets are not much better, down 18% YTD. Both markets have entered bear market territory this year.
To say that markets have been a bit pessimistic lately would be a massive understatement. I guess war and the threat of thermonuclear annihilation tends to do that.
Interestingly, the big outlier this year has been Canada’s stock market, down “only” 8%. While the Canadian economy has felt the same downward pressure as everyone else, the fact that our stock market is heavily oil dependent turned out to be a big advantage as our energy sector saw record profits as Canada furiously sold oil into the world’s Russia-sized supply hole.
But that was then. Now that we’re at the end of the year, we can see that the war in Ukraine hasn’t escalated into a WWIII-style conflict (if anything, the Ukrainians have been absolutely humiliating the Russian army all year). Thermonuclear threats haven’t materialized into anything, and even in the US, the surprisingly good performance of the Democrats during the midterm elections has shown that the world’s most important democracy is still capable of defending itself from autocrats both in and out of the country.
In other words, none of these completely rational fears ended up coming to pass. So while all this was terrible news for the stock market in 2022, the fact that we’re all still here is actually pretty good news, and could be setting us up for stock markets to stage a big recovery in 2023.
Unless Putin decides to invade Estonia or something. Then all bets are off.
On the economic front, the biggest story of the year was inflation.
I think we generally understood that the massive money printing world governments did during the pandemic wouldn’t come for free, but I don’t think any of us were expecting inflation to rear its head in 2022. Or at least, not with the speed and ferocity that it hit us with.
It was the war in Ukraine that really screwed everyone. We already had enough problems trying to stick the landing on all this COVID stimulus stuff without crashing the economy, and then Putin had to go start a war that prompted a flurry of NATO sanctions meant to cripple their economy. Gas prices were caught in the crossfire.
2022 was the year we all learned (or re-learned) how important stable gas prices are to the global economy. Food production, manufacturing, transportation, and even pharmaceuticals are all heavily dependent on oil, and when oil prices shoot up for whatever reason, virtually everything gets more expensive really fast.
We also learned how freaking hard it is to fight inflation. Millennials came of age during an extended period of low inflation and rock-bottom interest rates. Those days, apparently, are so over.
2022 has seen the sharpest rise in interest rates ever. In this year alone, central banks in the US and Canada have raised interest rates from 0.25% to 4.25%, a nose-bleed increase of 1600%!
The fallout of that has been profound, with the most obvious impact on mortgage rates. Last year, people were picking up mortgages at interest rates less than 2%. Now, you can’t get a mortgage under 5%, with more upside pressure coming down the pipe.
So that all sounds pretty bad, right? That’s got to be a clear negative drag on the economy.
And it would be…but it’s working.
On a year-over-year basis, inflation hit 7.1%, a slowdown from the 7.7% in October and lower than the 7.3% expected by analysts.Inflation slows to 7.1% for November, another sign the economy is cooling off, NBC News
Now, that might not seem that impressive, but you have to remember that the inflation numbers reported by the media are almost always year-over-year. In other words, that’s a comparison of prices between now and November 2021. Back then, we were learning about our new least favourite Greek letter Omicron, and economies around the world were shutting back down. So of course any comparison to that period will look awful.
It’s actually more interesting to look at month-to-month inflation readings, because that gives us a clearer picture of the near-term impact of these interest rate increases. In October, prices rose month-to-month by 0.4%, or 5% annualized. But in November, prices rose month-to-month by only 0.1%, or an annualized 1.2%.
That’s actually below the central bank’s target of 2%. If inflation stays right where it is now, then their job is done.
You can already see the impact in your day-to-day life most obviously by looking at gas prices. Remember when gasoline was $5 a gallon and everybody was freaking out every time they went to the pump?
A gallon of regular gas now sells for an average of $3.18, according to AAA. That marks a decline of 14 cents in the past week and 56 cents in the past month.Gas prices tumble to 15-month low, CNN
For all the panic at the beginning of the year over the impact of Russian sanctions, things seem to have calmed down nicely. Whatever decrease in oil supply that was caused by the Russian sanctions seem to have offset by an increasing supply from other oil-producing countries, Biden’s decision to release oil from the strategic petroleum reserve onto the open market, and an accelerated effort to bring more renewable energy sources online.
Remember that high oil prices was the reason that inflation rose so quickly to begin with. Now with gas prices approaching pre-pandemic levels, it looks like inflation will soon be in the rear view mirror as well.
The Jobs Market
However, the most confusing economic story of 2022 is what’s been happening in the job market.
Normally, when the stock market enters a bear market, the job market follows soon afterwards as companies trim payrolls in anticipation of a recession. But not this time.
The US economy added 263,000 jobs in November, defying aggressive action from the Federal Reserve to cool the economy and bring down decades-high inflation.US economy added a robust 263,000 jobs in November, CNN
The baffling direction of the job market has been the one big vanguard against a full-fledged recession, and last month as big layoffs were announced at big tech companies like Amazon and Twitter, we all thought that the other shoe was about to drop.
Nope! Instead, many of the tech workers that were laid off got scooped up by other industries that were continuing to grow, most notably leisure, travel, and hospitality. These sectors are still recovering from the impacts of the pandemic, and the gains in those industries have more than offset the losses in tech.
Even as the tech sector has been hammered by mass layoffs this year — more than 140,000 workers since March, by one count — the vast majority who have been let go haven’t remained on the sidelines for long. According to an analysis of laid-off workers conducted by Revelio Labs, a workforce-data provider, 72% have found new jobs within three months. Even more surprising, a little over half of them have landed roles that actually pay more than what they were earning in the jobs they lost.The hidden upside of tech layoffs, BusinessInsider
All of this is adding up to a rip-roaring job market and an unemployment rate hovering around 3.7% in the US, and 5.1% in Canada. Both figures are pretty much where unemployment stood before the pandemic.
This is great news. A recession’s main negative effect on people’s day-to-day lives is not in the stock market, or in abstract GDP numbers, but in employment. If we end up in a recession but the job market remains strong, then it hurts far less.
What’s In Store for 2023
Add it all together and you see the dilemma facing economists right now. Some indicators are pointing up, some are pointing down, and as a result nobody can agree on what 2023’s going to be like.
Here’s my hot take, for what it’s worth.
Inflation is cooling off nicely, and will continue to be brought under control next year. Rising interest rates will continue to cool people’s insane debt-fueled spending (looking at you, housing market) while the impact of pre-pandemic gas prices will continue to work its way through the supply chain and start to bring down prices of everything from lettuce to jeans.
The job market will continue adding jobs, especially in the sectors most impacted by the pandemic. Anyone who’s stepped foot in an airport lately knows that there’s a lot of hiring that still needs to be done in the travel and hospitality sector. We may continue seeing localized pain in tech, but now that practically every industry out there runs on computers, there will be plenty of places for those laid off tech workers to migrate to.
We will, in all honesty, probably enter a mild recession in 2023, as defined by 2 consecutive quarters of negative GDP growth. However, I don’t think we’ll see the mass unemployment that’s a signature of every other recession in history. And because of that, I don’t think we’ll see the mass defaults and the housing armageddon that we saw in 2008 either.
So my overall prediction is that 2023 will be the year of the RINO – Recession In Name Only.
So those are my calls for 2023.
What do you think? Do you think we’re sleepwalking into financial disaster, or do you think we’re going to be all right? Let’s hear it in the comments below!
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