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New Year, New Congress, New Economic Risks

With almost everyone having been blindsided by surging inflation and other unanticipated developments, neither economic nor political forecasters have fared particularly well in recent years. Nonetheless, key macroeconomic indicators offer at least a preliminary glimpse of what 2023 may hold in store for the US.

STANFORD – The economic, financial, and political chaos of 2022 has exposed the limits of forecasting. Recall the outlook from mid-2021, when very few observers were worried about inflation (I was among the small minority that was). The “Blue Chip” consensus – reflecting the views of 50 private-sector forecasters – was that the US consumer price index would rise by just 2.5% in 2022. Yet over the last 12 months, “core” CPI, which excludes volatile food and energy prices, has risen by 6%. Similarly, the US Federal Reserve’s preferred measure – the core personal consumption expenditures index – was expected to rise by just 2.7%; it is up 5%.

Then, when inflation did begin to surge, many insisted that it would be “transitory.” The Fed’s historically rapid tightening of monetary policy – repeatedly raising its policy rate by 75 basis points, before tempering its hikes with a 50-bps increase this month – was hardly on Fed watchers’ radar screens. In mid-2021, the three-month US Treasury bill yielded just 0.1%. Today, the yield is 4.23%.

Given these forecasting misfires, few in mid-2021 predicted a recession within the next few years. But now, almost 90% of Blue Chip analysts expect that real (inflation-adjusted) GDP growth in 2023 will be 1% or less, and about 40% of that cohort puts it at zero or negative. After large gains during the lockdown year, equity markets have entered bear territory, with technology stocks taking a huge hit.