A winter before conventional conditions
To see what we should wait from the US economy, we must watch the Fed and the US government's monetary and Economic policies. About the Fed, it is expected to raise the rate by another 50 basis points before going on hold till the end of the year. With 25 bps in February and another 25 bps rate hike in the March meeting, the fed would bring the fund's target range at 4.75-5.00%. This range is expected to stay through 2023. Fed will probably start its rate cut from December 2023 or at the first meeting of 2024 and will ease policy rates to a more neutral level by the end of 2024.
For 2023, since most central banks either will continue the rate hike or will hold the high rates, we will see a combination of more economic weakness, an increase in unemployment rates, more market volatility, and falling risky assets in line with inflation. Therefore, while downside risk in the near term seems more likely, the weakness will be more like a soft landing in the first half of the year.
The US economy shrunk by -2.8% in 2020 and raised 5.7% in 2021, and the 2022 growth rate must be 1.5-2% annually. The consensus expectation for GDP is a muted 0.5-1.7% pace in 2023. The longer-term average annual growth rate of the US GDP is 1.8%.
The US dollar gained more than 15% in 2022, which brought that to its more than 20-year high. Since the Fed rate hike pace was much faster than major central banks, including the ECB, BoJ, and BoE, USD also had most of its gains against them. Higher rates made the USD profit almost 10% against Euro, 11% against the Sterling, and 22% against the Japanese Yen. While for 2023, we expect the US dollar to hold its gain and extend slightly this year, more improvements will come from emerging market currencies.
As we expect to see the US dollar still strong through 2023, it can affect the US import, export, and company income as one of the main results. A stronger USD will make the producer prices higher. Therefore export price index will rise and can put the US companies in a weaker position against their rivals. At the same time, a weaker dollar can raise imports, as they will be cheaper for US consumers. The US trade balance is supposed to get hit if the US dollar stays strong, so before any changes in the year's second half, US stock markets could test lower levels, as company earnings will decrease.
Rapid interest rate changes from 2020 to now and what is predicted for 2023 and 2024 changed consumer spending and saving behaviors. Looking at general numbers shows everything is fine. Despite the recession, inflation, and supply chain shortage, household spending balance sheets remain healthy. However, looking deeper at the numbers telling that most spending in 2022 comes from savings that consumers had during 2020-21 and increasing incomes observed in 2022. Household savings before 2022 were about 2-2.4 trillion dollars, now around $1.2-1.8 trillion. Since in 2023, wage growth will differ from in 2022, and some sectors can even decrease. Therefore consumers have two choices, continue the same pace of spending, which means much less saving, or slow down the expenditure. No matter what consumers going to choose, the numbers would not be in favor of financial markets and producers.
During the pandemic, the manufacturing sector hit less than the service sector, therefore, recovered much faster; that is why manufacturing sector headwinds are building, but services are still benefitting from normalization. This year, people are expected to spend more on services than goods, especially in the first half, but we can see the balance and total normalization for the year's second half.
In short, before returning to conventional conditions, the US economy in 2023's supposed to see the winter one more time.
