Yes, we are beginning 2023 and still reporting on COVID-19, its effects and impact on our economy three (!) years after the first likely cases in China (and perhaps in the US, too).

So, where have we come in the past three years?

An edited timeline:

  • December 12, 2019-A cluster of patients in China’s Hubei Province, in the city of Wuhan, begin to experience the symptoms of an atypical pneumonia-like illness that does not respond well to standard treatments.
  • December 31, 2019-    The World Health Organization (WHO) Country Office in China is informed of several cases of a pneumonia of unknown etiology (cause) with symptoms including shortness of breath and fever occurring in Wuhan, China. All initial cases seem connected to the Huanan Seafood Wholesale Market.
  • January1, 2020-The Huanan Seafood Wholesale Market in Wuhan is closed amid worries in China of a reprise of the 2002–2004 SARS (Severe Acute Respiratory Syndrome Coronavirus or SARS-CoV-1) outbreak.
  • January 3, 2020-    China informs WHO that they have identified over 40 cases of pneumonia of unknown etiology.
  • January 5, 2020-    As the disease spreads in Wuhan, Chinese public health officials share the genetic sequence of the atypical pneumonia virus, Wuhan-Hu-1, with the rest of the world through an online database.
  • January 7, 2020-Public health officials in China identify a novel coronavirus as the causative agent of the outbreak.
  • CDC establishes an incident management structure to guide their response to the novel coronavirus by following the preparedness plan for developing tests and managing cases made for Middle East Respiratory Syndrome Coronavirus (MERS-CoV).
  • January 10, 2020-WHO announces that the outbreak in Wuhan, China is caused by the 2019 Novel Coronavirus (2019-nCoV).
  • January 13, 2020-The Thailand Ministry of Public Health confirms the first laboratory-confirmed case of the SARS-CoV-2 virus outside of China.
  • January 14, 2020-WHO finds evidence of possible human-to-human transmission of the SARS-CoV-2 virus, but WHO scientists say that human-to-human transmission is not surprising given our knowledge of respiratory pathogens.
  • January 15, 2020-The Japanese Ministry of Health, Labor and Welfare reports an additional laboratory-confirmed case of the SARS-CoV-2 virus outside of China.
  • January 17, 2020-CDC begins screening passengers for symptoms of the 2019 Novel Coronavirus on direct and connecting flights from Wuhan, China to San Francisco, California, New York City, New York, and Los Angeles, California and plans to expand screenings to other major airports in the U.S.
  • January 19, 2020-Worldwide, 282 laboratory-confirmed cases of the 2019 Novel Coronavirus have been reported in four countries: China (278 cases), Thailand (2 cases), Japan (1 case) and the Republic of Korea (1 case).
  • January 20, 2020-CDC reports the first laboratory-confirmed case of the 2019 Novel Coronavirus in the U.S. from samples taken on January 18 in Washington state and on the same day activates its Emergency Operations Center (EOC) to respond to the emerging outbreak.
  • January 21, 2020-Chinese government officials confirm that human-to-human transmission is driving the spread of the SARS-CoV-2 virus in China.
  • January 23, 2020-Wuhan, China— a city of 11 million people— is placed under lockdown due to the 2019 Novel Coronavirus outbreak.
  • January 24, 2020-CDC confirms a travel-related infection of the SARS-CoV-2 virus in Illinois, bringing the total number of cases in the U.S. to two.
  • January 26, 2020-CDC confirms additional travel-related infections of the SARS-CoV-2 virus in Arizona and California, bringing the total number of cases in the U.S. to five.
  • January 27, 2020-    The U.S. Food and Drug Administration (FDA) announces that it will take “critical actions to advance development of novel coronavirus medical countermeasures” with interagency partners, including CDC.
  • January 28, 2020-CDC issues a Level 3 Travel Health Notice— advising travelers to avoid all non-essential travel to China due to the 2019 Novel Coronavirus outbreak.
  • The U.S. government relocates U.S. citizens from Wuhan, China back to the U.S. due to the 2019 Novel Coronavirus (2019-nCoV).
  • January 30, 2020-CDC confirms that the SARS-CoV-2 virus has now spread between two people in Illinois with no history of recent travel. This is the first recorded instance of person-to-person spread of the 2019 Novel Coronavirus in the U.S and brings the total number of cases up to seven.
  • January 31, 2020-CDC issues 14-day federal quarantine orders to all 195 U.S. citizens who were repatriated back to the U.S. on January 29, 2020, from Wuhan, China.
  • WHO’s International Health Regulation Emergency Committee reconvenes early to declare the 2019 Novel Coronavirus outbreak a Public Health Emergency of International Concern (PHEIC).
  • The Secretary of the Department of Health and Human Services (HHS), Alex Azar, declares the 2019 Novel Coronavirus (2019-nCoV) outbreak a public health emergency.
  • February 3, 2020-The Department of Homeland Security (DHS) directs all flights from China and all passengers who have traveled to China within the last 14 days to be routed through one of eleven airports in the U.S. for enhanced screening procedures and possible quarantine.
  • CDC submits an emergency use authorization (EUA) to FDA to expedite approval for a CDC developed SARS-CoV-2 diagnostic test.
  • February 10, 2020-Worldwide deaths from the 2019 Novel Coronavirus reach 1,013. The SARS-CoV-2 virus has now killed more people than the severe acute respiratory syndrome (SARS-CoV-1) outbreak, which claimed 774 lives globally from November 2002 to July 2003.
  • February 11, 2020-WHO announces the official name for the disease that is causing the 2019 Novel Coronavirus outbreak: “COVID-19.” The new name of this disease is an abbreviated version of “Coronavirus Disease 2019.”
  • February 13, 2020-CDC confirms the 15th case of COVID-19 in the U.S.
  • February 18, 2020-Due to the high case load and numbers of asymptomatic individuals testing positive for COVID-19, all passengers and crew of the Diamond Princess cruise ship are quarantined off the coast of Japan, placed under travel restrictions, and are prevented from returning to the U.S. for at least 14 days after they have left the Diamond Princess.
  • February 23, 2020-As Italy becomes a global COVID-19 hotspot, the Italian government issues Decree-Law No. 6, containing urgent measures to contain and manage the epidemiological emergency caused by COVID-19, effectively locking down the country.
  • February 28, 2020-CDC reports four additional presumptive positive cases of COVID-19 in California, Oregon, and Washington: one case is likely travel-related, but three are likely due to community spread of the SARS-CoV-2 virus in the U.S.
  • February 29, 2020-CDC and the Washington Department of Public Health report the first death in an individual with laboratory-confirmed COVID-19 in the U.S. The patient was a male in his 50s who was hospitalized with a pneumonia of unknown cause and later died of his illness.
  • March 3, 2020-CDC reports 60 cases of COVID-19 across Arizona, California, Florida, Georgia, Illinois, Massachusetts, New Hampshire, New York, Oregon, Rhode Island, Washington, and Wisconsin. Of the 60 COVID-19 infections detected, 21 are travel-related, 11 are from person-to-person spread, and 27 are unknown.
  • March 11, 2020-After more than 118,000 cases in 114 countries and 4,291 deaths, the WHO declares COVID-19 a pandemic.
  • March 13, 2020-The Trump Administration declares a nationwide emergency and issues an additional travel ban on non-U.S. citizens traveling from 26 European countries due to COVID-19.
  • March 15, 2020-    States begin to implement shutdowns in order to prevent the spread of COVID-19. The New York City public school system— the largest school system in the U.S., with 1.1 million students— shuts down, while Ohio calls for restaurants and bars to close.
  • March 19, 2020-California governor Gavin Newsom issues a statewide stay-at-home order to slow the spread of COVID-19 instructing residents to only leave their homes when necessary and shutting down all but essential businesses.
  • March 27, 2020-The Trump Administration signs the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law. The act includes funding for $1,200 per adult (with expanded payments for families with children), expanded unemployment benefits, forgivable small business loans, loans to major industries and corporations, and expanded funding to state and local governments in response to the economic crisis caused by COVID-19.
  • March 28, 2020-To prevent the spread of COVID-19, the White House extends all social distancing measures until through the end of April 2020.
  • March 31, 2020-At a White House Press Briefing, Dr. Anthony Fauci and Dr. Deborah Brix announce that between 100,000 and 240,000 deaths in the U.S. are expected— even if social distancing and public health measures are perfectly enacted.
  • April 3, 2020- At a White House press briefing, CDC announces new mask wearing guidelines and recommends that all people wear a mask when outside of the home.
  • April 4, 2020-More than 1 million cases of COVID-19 had been confirmed worldwide, a more than ten-fold increase in less than a month.
  • April 13, 2020-Most states in the U.S. report widespread cases of COVID-19.
  • April 30, 2020-The Trump Administration launches Operation Warp Speed, an initiative to produce a vaccine against the SARS-CoV-2 virus as quickly as possible. The operation funds the development of six promising vaccine candidates while they are still in the clinical trial phase, including the Pfizer-BioNTech and Moderna mRNA vaccines.
  • Since mid-March 2020, more than 26.5 million people in the U.S. have filed for unemployment, increasing the number of people without health insurance amid a pandemic.
  • May 8, 2020-FDA authorizes the first COVID-19 test with the option of using home-collected saliva samples.
  • May 9, 2020-The unemployment rate in the U.S. is 14.7%— the highest since the Great Depression. With 20.5 million people out of work, the hospitality, leisure, and healthcare industries take the greatest hits overall, affecting essential workers, people with lower incomes, and racial and ethnic minority workers disproportionally.
  • May 21, 2020-AstraZeneca receives more than $1 billion from the U.S. government in funding for the development of the AstraZeneca/Oxford University COVID-19 vaccine, with the first doses due to arrive in September 2020.
  • May 28, 2020-The recorded death toll from COVID-19 in the U.S. surpasses 100,000.
  • June 8, 2020-The World Bank states that the COVID-19 pandemic will plunge the global economy into the worst recession since World War II.
  • June 10, 2020-The number of confirmed COVID-19 cases in the U.S. surpasses 2 million.
  • July 7, 2020-The number of confirmed COVID-19 cases in the U.S. surpasses 3 million.
  • July 16, 2020-Many states, including California, Michigan, and Indiana postpone re-opening plans as COVID-19 case numbers rise.
  • August 17, 2020-COVID-19 becomes the 3rd leading cause of death in the U.S. Deaths from COVID-19 now exceed 1,000 per day and nationwide cases exceed 5.4 million.
  • September 16, 2020-HHS announces a plan to make COVID-19 vaccines free in the U.S.
  • September 22, 2020-The reported death toll in the U.S from COVID-19 surpasses 200,000.
  • September 28, 2020-The reported death toll from COVID-19 reaches more than 1 million worldwide— in just 10 months.
  • November 4, 2020-The U.S. reports 100,000 new cases of COVID-19 in 24 hours.
  • November 13, 2020-Two weeks after large groups gathered for Halloween celebrations, COVID-19 case numbers spike across the U.S.
  • November 16, 2020-Moderna’s COVID-19 vaccine is found to be 95.4% effective in its clinical trial.
  • November 18, 2020-Pfizer-BioNTech’s COVID-19 vaccine is found to be 95% effective in their 44,000-person trial.
  • December 11, 2020-FDA issues an Emergency Use Order (EUO) for the Pfizer-BioNTech COVID-19 vaccine.
  • December 14, 2020-The recorded death toll from COVID-19 in the U.S surpasses 300,000.
  • Sandra Lindsay, a nurse in New York, becomes the first American outside of clinical trials to receive a COVID-19 vaccine.
  • December 18, 2020-FDA issues an EUA for the Moderna COVID-19 vaccine.
  • December 19, 2020-ACIP recommends the Moderna COVID-19 vaccine in persons ages 18 years or older for the prevention of COVID-19.
  • December 23, 2020-The Trump Administration announces the purchase of 100 million additional doses of the Pfizer-BioNTech COVID-19 vaccine.
  • December 24, 2020-More than 1 million COVID-19 vaccine doses have been administered in the U.S. in just 10 days: healthcare workers and older adults living in long-term care facilities are the first to be vaccinated with the goal of vaccinating every person as soon as enough vaccine doses are available
  • December 27, 2020-The Trump Administration signs the second COVID Relief Act into law. The bill includes $900 billion in funding for enhanced unemployment benefits, business loans, the purchase and distribution of COVID-19 vaccines and testing kits, and direct cash payments of $600.
  • December 31, 2020- year anniversary of the first reported case of COVID-19 to WHO. 2.8 million people in the U.S. have received a COVID-19 vaccine dose— far short of the nation’s goal of 20 million.
  • January 18, 2021-The reported death toll from COVID-19 in the U.S. surpasses 400,000.
  • January 26, 2021-More than 23 million COVID-19 vaccine doses have been administered in the U.S. The number of recorded COVID-19 cases worldwide surpasses 100 million.
  • February 18, 2021- An estimated 2.5 million women and 1.8 million men have left the workforce since the start of the pandemic in the U.S.
  • February 21, 2021-The recorded COVID-19 death toll in the U.S. surpasses 500,000.
  • February 27, 2021-FDA approves an emergency use authorization (EUA) for Johnson & Johnson’s one-shot COVID-19 vaccine for all people ages 18 years and older.
  • March 8, 2021-CDC recommends that people who are fully vaccinated against COVID-19 can safely gather with other fully vaccinated people indoors without masks and without socially distancing.
  • March 11, 2021-The Biden Administration signs the $1.9 trillion American Rescue Plan into law. The stimulus bill includes funding for expanded unemployment benefits, rental assistance, and COVID-19 vaccinations, as well as extending the child tax credit for one year and providing direct cash payments of up to $1,400 per person.
  • March 13, 2021-More than 100 million COVID-19 vaccine doses have been administered in the U.S.
  • April 21, 2021-More than 200 million COVID-19 vaccine doses have been administered in the U.S.
  • May 10, 2021-FDA expands the emergency use authorization (EUA) for the Pfizer-BioNTech COVID-19 vaccine to include all adolescents ages 12–15 years.
  • May 17, 2021-An estimated 5.1 million women left the workforce when COVID-19 closed schools and child-care centers in 2020. Today, 1.3 million remain out of the workforce and only 56% of women in the U.S. are working for a salary– the lowest percentage since 1986.
  • June 1, 2021-The COVID-19 B.1.617.2 / “Delta” variant, first identified in India, becomes the dominant variant in the U.S. The variant begins a third wave of infections during the summer of 2021.
  • July 6, 2021-American Indian and Alaska Natives had some of the highest rates of hospitalization and death in the U.S. early in the pandemic, but American Indian and Alaskan Native vaccination campaigns are succeeding: CDC’s COVID-19 data tracker shows that American Indians and Alaskan Natives have the highest COVID-19 vaccination rate of any racial or ethnic group in the U.S.
  • August 23, 2021-FDA fully approves the Pfizer-BioNTech COVID-19 vaccine for all people ages 18 years and older.
  • October 7, 2021-More than 140,000 children in the U.S. have lost their primary or secondary caregiver to the COVID-19 pandemic. One of every 168 American Indian and Alaska Native children, 1 of every 310 Black children, 1 of every 412 non-White Hispanic children, 1 of every 612 Asian children, and 1 of every 753 White children have now experienced orphanhood or the death of caregivers.
  • November 2, 2021-ACIP recommends the Pfizer-BioNTech pediatric COVID-19 vaccine for all children ages 5–11 years.
  • November 8, 2021-All non-citizens who are traveling to the U.S. will now be required to be fully vaccinated and provide proof of their vaccination status to fly to the U.S. All travelers will continue to be required to show a negative pre-departure COVID-19 test taken no more than three days before they board their flights.
  • December 1, 2021-The first case of the Omicron variant in the U.S. is detected by the California and San Francisco Departments of Public Health.
  • December 9, 2021-CDC and FDA expand COVID-19 booster recommendations to include everyone ages 16 years and older.
  • December 15, 2021-The recorded death toll from COVID-19 surpasses 800,000 in the U.S. One in every 100 people ages 65 years and older in the U.S. has died.
  • January 3, 2022-The U.S. reports nearly 1 million new COVID-19 infections– the highest daily total of any country in the world. The number of hospitalized COVID-19 patients has risen nearly 50% in just one week.
  • January 14, 2022-In one month, the daily average of new COVID-19 infections reported in the U.S. spikes from 119,215 to 805,062.
  • January 24, 2022-The Omicron variant now accounts for approximately 99% of all current COVID-19 cases in the U.S.
  • January 31, 2022-FDA fully approves the Moderna COVID-19 vaccine for all people ages 18 years and older. Full FDA approval further reinforces that the Moderna COVID-19 vaccine has been shown to meet the agency’s high standards for safety, effectiveness, and consistent quality in manufacturing.
  • March 5, 2022-More than 10 billion people have received a COVID-19 vaccine, with WHO reporting that 10,704,043,684 COVID-19 vaccine doses have been administered worldwide. About 56% of the world is now fully vaccinated, but many regions still lack access, especially on the African continent where less than 20% of the total population is currently vaccinated.
  • March 8, 2022-Hawaii becomes the last state to announce an end to its universal indoor mask mandate, scheduled for March 26, 2022.
  • March 10, 2022-The number of recorded deaths due to COVID-19 surpasses 6 million worldwide, with WHO reporting 6,019,085 confirmed deaths. The true number is likely much higher. The number of recorded COVID-19 cases surpasses 450 million worldwide, with WHO reporting 450,229,635 confirmed infections. The true number is likely much higher.
  • March 11, 2022-    CDC updates the “COVID-19 Community Level,” showing that more than 98% of the U.S. population is in a location with either a low or medium COVID-19 community transmission levels.
  • March 12, 2022-CDC estimates that 23% of all current COVID-19 infections in the U.S. are caused by the Omicron BA.2 subvariant, with initial data suggesting that BA.2 appears to be more transmissible than the Omicron BA.1 variant.
  • April 13, 2022-The Omicron subvariant BA.2 now makes up more than 85% of all new COVID-19 infections in the U.S.
  • April 18, 2022-CDC’s mask mandate for indoor public transportation is struck down by a judge in Florida.
  • April 22, 2022-For the second year in a row, COVID-19 was the third leading cause of death in the U.S.– after heart disease and cancer.
  • May 5, 2022-WHO estimates that there have been approximately 15 million direct or indirect deaths (also called “excess mortality”) globally from January 2020 – December 2021 that were caused by the COVID-19 pandemic. South-East Asia, Europe, and the Americas accounted for 84% of the excess deaths.
  • May 12, 2022-The number of recorded deaths due to COVID-19 in the U.S. reaches 1 million (1,000,000).
  • May 19, 2022-ACIP recommends Pfizer-BioNTech’s COVID-19 vaccine boosters for everyone ages 5–11 years to be given at least 5 months after their primary vaccination series. ACIP also recommends everyone ages 12 years and older who is immunocompromised and those ages 50 years and older should receive a second booster dose at least 4 months after their first to prevent severe disease, hospitalization, and death.
  • May 28, 2022-The weekly average of new COVID-19 infections in the U.S. is now six times higher than it was in 2021. Currently, there are 119,725 new cases reported each week– a number that is “grossly underreported” according to experts– compared to May 28, 2021, when there were 17,887.
  • June 1, 2022-The U.S. has recorded a total of 84,145,569 COVID-19 infections and 1,003,571 deaths.
  • June 18, 2022-ACIP recommends Moderna and Pfizer-BioNTech’s COVID-19 vaccines for everyone ages 6 months – 5 years, expanding vaccine eligibility to over 20 million additional children in the U.S. All people ages 6 months and older are now eligible for COVID-19 vaccination in the U.S.
  • June 30, 2022-As COVID-19 case numbers rise across the U.S. due to the highly transmissible omicron subvariants BA.4 and BA.5., FDA calls for Omicron-specific updates to COVID-19 vaccine boosters from Pfizer-BioNTech and Moderna in fall 2022.

 

You can view the entire CDC COVID-19 Timeline here: https://www.cdc.gov/museum/timeline/covid19.html

And your Pasadena Chamber: 

  • Immediately provided information on a daily basis about the shutdown, COVID, safety protocols and where to get help.
  • Instituted Food for First Responders to provide meals for frontline healthcare workers at Huntington Hospital by subsidizing take out meals from local restaurants for doctors, nurses and workers in the COVID-19 wards at the hospital. 
  • Phoned every Chamber member business in April and May, 2020, to ask about conditions and what help they needed. Provided an objective "shoulder to cry on" for many members with no one else to openly discuss their financial and business challenges. 
  • Helped more than 140 Chamber member businesses and non-member businesses navigate the pandemic aid relief programs and apply for PPP and EIDL grants and loans.
  • Provided updates on rules, regulations, cases and more to our email blast list. (Sometimes more than daily and continuing into 2023.)
  • Advocated for small business loans for locally owned companies threatened with closure due to COVID-q9 restrictions.
  • Helped member companies identify lenders and secure funding through the PPP loan process.
  • Argued for the City of Pasadena to provide grants to struggling local small businesses. After three months, the City finally provided $500,000 toward a grant program to give $10,000 to local businesses.
  • Worked with the Pasadena Community Foundation to identify and distribute City of Pasadena grants to local small businesses.  
  • Advocated for reasonable re-openings for businesses. (Many Chamber members were recipients.)
  • Worked to implement and promote safe re-opening protocols.
  • Advocated on the state, regional and local level for reasonable re-opening regulations and advance notification to businesses of impending closure orders. 
  • Advocated with the City of Pasadena for use of federal funding to support small grants to micro businesses. 
  • Helped members and others prepare paperwork and apply for loan forgiveness. (Forgiveness rate among Pasadena Chamber members is more than 98% so far.)
  • Helped create the Coalition for Safe Re-opening in California to advocate for clear, concise and reasonable government regulation to fight COVID. 
  • Were here to listen and provide support to those impacted by COVID-19 shutdowns.
  • Provided online forums for discussion, meetings and networking.

 

Cases:

  • Los Angeles County has seen 34,643 deaths due to COVID-19 and more than 3,630,000 cases.
  • California has seen more than 11,800,000 cases and 101,000 deaths due to COVID.
  • The United States has experienced 100,622,056 cases and 1,088,481 deaths due to COVID-19.
  • Worldwide there have been 664,381,851 cases and 6,695,634 deaths reported as of December 29, 2022.
  • Pasadena has experienced 38,597 cases and 2,589 deaths due to COVID. There were 48 new cases and no fatalities reported on December 29th.

 

I admit, it would be nice to not report these numbers, but as long as COVID is effecting our members, our community and our businesses, I feel it is important to provide information on the pandemic and its impacts.

Health Orders: After January 1, 2023, the County’s Health Officer Order will continue to require that employers within the Los Angeles County Public Health jurisdiction report clusters of 3 or more COVID-19 cases among their employees, workers, or volunteers within a 14 day period to Los Angeles County Public Health at (888) 397-3993 or (213) 240-7821, or online at www.redcap.link/covidreport.   

There is no change to the present reporting requirement.  Continued reporting of COVID-19 case clusters and outbreaks at workplaces is especially important during the winter surge of respiratory infections.  Public Health’s outbreak investigators help employers to mitigate the impact of COVID-19 outbreak among their workforce. 

Recently the California Legislature passed Assembly Bill 2693 (AB 2693), which amended certain COVID-19 workplace response requirements.  The County will align with the new employer workplace COVID-19 exposure notification options: (1) Direct written notice to employees or (2) Posted written notice at the worksite.   Although state law no longer includes an employer reporting requirement, to protect workers against ongoing COVD-19 transmission, Public Health will continue to require employers report clusters of COVID-19 cases within 48 hours.

In addition, employers should do the following to protect their workforce during this busy holiday season:

  • Encourage employees to get vaccinated against both influenza (flu) and COVID-19 and to stay up to date with their COVID-19 vaccines and boosters.  Fill out a Public Health Mobile Vaccine Team Interest Form to host a vaccination clinic at your worksite.
  • Provide well-fitting medical masks and respirators (e.g., N95, KN95, KF94) at no cost to employees who work indoors and have contact with other workers, customers, or members of the public.
  • Promote indoor mask wearing among employees, visitors, and customers by posting signage on the importance of indoor mask wearing.
  • Actively encourage and support employees to stay home when sick.

 

Other pertinent information and resources can be found on the Los Angeles County Department of Public Health website at http://publichealth.lacounty.gov/media/Coronavirus/

 

I think there is more than a little truth in this one:

Pearls Before Swine comic on COVID

 

 

 

 

The Economy: Global stocks and bonds lost more than $30tn in 2022 as inflation, interest rate rises and war in Ukraine triggered the heaviest losses in asset markets since the financial crisis.

From the World Bank: Following a strong rebound in 2021, the global economy is entering a pronounced slowdown amid fresh threats from COVID-19 variants and a rise in inflation, debt, and income inequality that could endanger the recovery in emerging and developing economies, according to the World Bank’s latest Global Economic Prospects report. Global growth is expected to decelerate markedly from 5.5 percent in 2021 to 4.1 percent in 2022 and 3.2 percent in 2023 as pent-up demand dissipates and as fiscal and monetary support is unwound across the world.

The rapid spread of the Omicron variant indicates that the pandemic will likely continue to disrupt economic activity in the near term. In addition, a notable deceleration in major economies—including the United States and China—will weigh on external demand in emerging and developing economies. At a time when governments in many developing economies lack the policy space to support activity if needed, new COVID-19 outbreaks, persistent supply-chain bottlenecks and inflationary pressures, and elevated financial vulnerabilities in large swaths of the world could increase the risk of a hard landing.

The slowdown will coincide with a widening divergence in growth rates between advanced economies and emerging and developing economies. Growth in advanced economies is expected to decline from 5 percent in 2021 to 3.8 percent in 2022 and 2.3 percent in 2023—a pace that, while moderating, will be sufficient to restore output and investment to their pre-pandemic trend in these economies. In emerging and developing economies, however, growth is expected to drop from 6.3 percent in 2021 to 4.6 percent in 2022 and 4.4 percent in 2023. By 2023, all advanced economies will have achieved a full output recovery; yet output in emerging and developing economies will remain 4 percent below its pre-pandemic trend. For many vulnerable economies, the setback is even larger: output of fragile and conflict-affected economies will be 7.5 percent below its pre-pandemic trend, and output of small island states will be 8.5 percent below.

Meanwhile, rising inflation—which hits low-income workers particularly hard—is constraining monetary policy. Globally and in advanced economies, inflation is running at the highest rates since 2008. In emerging market and developing economies, it has reached its highest rate since 2011. Many emerging and developing economies are withdrawing policy support to contain inflationary pressures—well before the recovery is complete.

Each month Oxford Economics’ team of 300 economists and analysts updates our baseline forecast for 200+ countries using our innovative Global Economic Model. Fully linking individual country models through global assumptions about trade volume and prices, competitiveness, capital flows, interest and exchange rates, and commodity prices, our model provides a rigorous and consistent structure for forecasting and understanding the impact of economic shocks. Below is just the top-level summary of our analysis of the latest economic developments.

  • We think recent data support our view that the world economy will underperform the consensus expectation next year.
  • Our forecast for world GDP growth to slow from 3% this year to 1.3% in 2023 is little changed from a month ago.
  • Timely economic indicators continue to suggest that world GDP growth will slow markedly in Q4, following Q3’s temporary strength triggered by China’s easing of lockdown measures.

 

From the Organisation for EconomicCo-operation and Development: The global economy is facing significant challenges. Growth has lost momentum, high inflation has broadened out across countries and products, and is proving persistent. Risks are skewed to the downside. Energy supply shortages could push prices higher. Interest rates increases, necessary to curb inflation, heighten financial vulnerabilities. Russia’s war in Ukraine is increasing the risks of debt distress in low income countries and food insecurity.

The world is coping with a massive energy price shock: Russia’s war of aggression against Ukraine has provoked a massive energy price shock not seen since the 1970s. The increase in energy prices is taking a heavy toll on the world economy, which will worsen if European gas storage runs short. This could force rationing in Europe, hurt countries worldwide as global gas prices are pushed higher. Growth would be lower and prices higher in Europe and worldwide.

17.7% of GDP spent on energy 

Growth has been slowing: Tighter monetary policy and higher real interest rates, persistently high energy prices, weak real household income growth and declining confidence are all expected to sap growth. The United States and Europe are slowing sharply and the major Asian emerging-market economies are expected to account for close to three-quarters of global GDP growth in 2023.

2.2% world GDP growth in 2023

Inflation will remain high in 2023, but will moderate: Inflationary pressures have intensified, largely due to the war in Ukraine, which has pushed up energy and food commodity prices. The higher price of energy has helped trigger increasing prices across a broad basket of goods and services. Tighter monetary policy and decelerating growth will help to eventually moderate inflation.

From the Royal Bank of Canada: In our view, 2023 is set to be a challenging year for the US. Recession is likely to make itself felt in earnest around the middle of the year. The sluggish economic backdrop should persist throughout 2023 and into 2024.

Inflation, however, should continue to slow. Core inflation could sink to between 3% and 4% by mid-year, and below 3% by the year-end. We expect this will be an organic decline, starting even before the Federal Reserve interest rate hikes have had a chance to take effect.

Fed hikes are likely to continue for a while, but we believe the cycle will end in the first half of 2023. Rate cuts would then be on the agenda, though these are expected to be limited to a couple of reductions and economic activity is unlikely to justify more aggressive easing.

Unemployment may rise again, potentially reaching around 5%. This should about a reduction in wages, which in turn will likely have a dampening effect on consumer appetite.

While we expect only modest job losses in 2023, this may change depending on corporate profitability levels. Over the past year, profits have only been retained because companies were able to pass on price increases. If spend volumes remain flat, businesses may seek more significant workforce cuts.

From KPMG (an exhaustive analysis): A Wonderful World? 2023 Outlook
Rates hikes by the Federal Reserve and weaker growth abroad will likely trigger a shallow recession in 2023.

Airplane in hangar
 Diane Swonk
Diane Swonk
Chief Economist, KPMG US
+1 312-665-1000
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Cover art
A Wonderful World? 2023 Outlook
The silver lining is the eventual rebound when the Fed shifts to cutting interest rates.
Louis Armstrong recorded “What a Wonderful World” in 1967. The song was less about what the world was than what it could be. The Vietnam war was raging, protests were escalating and the civil rights movement was revealing deep divisions in the fabric of our culture.

Jobs were plentiful, but at a price: escalating inflation. The Federal Reserve clashed with the president when it raised rates to counter inflation. The pressure was so intense that the Fed stopped short of derailing inflation; by the end of the 1960s inflation had tripled.

The pressure from the White House intensified with a new president in 1969. The Fed bowed to pressure to stimulate to ensure the president’s reelection in 1972. That provided dry tinder for the stagflation that took root when OPEC cut oil production in 1973.

Former Fed Chairman Arthur Burns laid out his mistakes in a famous speech in 1979. The Fed failed to slay the inflation beast, not once but several times. One of his successors was in the audience and took the lessons to heart. Paul Volcker initiated two brutal, back-to-back recessions to slay what had become a more powerful beast in the early 1980s.

Wages collapsed, while the gap between wage and productivity growth widened; living standards deteriorated and inequality worsened. Former industrial meccas became ghost towns. Men were hit hardest as blue-collar jobs disappeared. Large swaths of the population were sidelined, seeding the political divisions we are enduring today.

Current Fed Chairman Jay Powell is a student of history. He is committed to avoiding past mistakes and has proven he can hold his ground against a hostile White House.

Powell and his colleagues know the reality we face, that it can be dealt with and there is a better world to be had on the other side. That is the metaphor embedded in Armstrong’s iconic song.

Inflation is like cancer. If left untreated, it can metastasize into a fatal condition. The Fed has a cure:  to catch it early and limit the pain of the treatment.

Powell laid out the threat we face in his most recent speech. A cooling of goods inflation and shelter costs will slow inflation but may not be enough to stop it from metastasizing. Service sector inflation is accelerating in the areas most sensitive to labor costs.

The Fed has limited tools. It can only hammer demand to meet an undersupplied world. Labor is among the most supply constrained.

Aging demographics, the pandemic and a sharp slowdown in legal immigration have left us with fewer workers than needed. Labor shortages are more structural than cyclical. A one-time rise in unemployment may not solve the problem; unemployment may have to remain higher, even after the Fed has derailed inflation.

The November employment report underscored the risks. Job gains continued to surge, while wages accelerated; wages in the service sector, where inflation is stickiest, drove those gains.

The Fed’s baseline forecast assumes rate hikes will stall the economy and raise unemployment. At the November meeting it concluded that risks were to the downside; the baseline and the probability of a full-blown recession were neck and neck. Either way, the economy will slow and unemployment will rise.

The silver lining is that Fed-induced recessions are easier to recover from than balance sheet recessions, like we saw in 2008-09. Household and large firm balance sheets are in better shape, which means they can more rapidly respond to the stimulus of a cut in rates when it occurs.

This special edition of Economic Compass looks at the outlook for 2023, how the slowdown is expected to play out by sector and what those shifts mean for different industries. Rate hikes are accelerating the pivot away from spending on goods to services. Millions are scrambling to escape their homes, step out with friends and feel the embrace of loved ones.

The pandemic-induced bubble is bursting. The industries that were winners are losing, while those that suffered the most from initial quarantines are winning.

Large firms have an upper hand as they have either paid down their debt or locked into low rates. Small and mid-size firms, including startups, are more sensitive to rate hikes. Industries will consolidate.

Executive Summary

Real GDP growth expanded at a revised 2.9% annual pace in the third quarter, reversing two quarters of declines. The overwhelming bulk of that “strength” was due to a sharp narrowing of the trade deficit. Exports surged as supply chain problems eased, while imports plummeted.

Prospects for the fourth quarter are worse, with real GDP rising less than 0.7%. Annual growth is expected to come in at 1.9% in 2022. Fourth- quarter-to-fourth-quarter real GDP growth, which more closely tracks momentum in the economy, is expected to slow to 0.3% in 2022.

Rate hikes by the Federal Reserve and weaker growth abroad are expected to trigger a shallow recession in 2023. Real GDP growth is expected to contract by 0.2% in 2023, while fourth-quarter-to-fourth-quarter growth drops by 0.3%. Fed-induced recessions are inherently easier to recover from than balance sheet recessions, like 2008-09.

Surging federal debt has limited the fiscal space that the federal government can tap to offset the impact of a recession; fiscal stimulus would also complicate the Fed’s battle against inflation.

The greatest threat to the outlook is a showdown over the lifting of the debt ceiling, which it is hoped will be avoided. The recent experience in the U.K. suggests that bond market participants have grown weary of such nonsense. Calmer heads in Congress on both sides of the aisle are doing their best to avert a showdown.

2023 Outlook: Anatomy of a Recession

The losses are expected to be close to the 2001 and 1990-91 recessions but well short of the carnage of 2008-09 or 2020. (The threshold is low.)

The subsequent recovery in 2024 is expected to be more robust than previous recoveries, except for the pandemic. The largest limit will be labor shortages, as they could cap our ability to generate new jobs while triggering another bout of inflation.

Unemployment Drifts Higher

Chart 2 shows that the unemployment rate is expected to approach 5.5% by year-end. That is low when compared with other recessions.

Rising retirements, ongoing staffing shortages and the desire by firms to hold onto workers they fought hard to hire are expected to dampen the impact on unemployment. Research by the Fed suggests that more than 2 million of the 3.5 million missing from the labor force are retirees.

Many older workers had COVID and are unable to work due to long COVID. Younger retirees are now needed to care for grandchildren and elderly parents, given acute labor shortages in childcare and long-term care.

This is in addition to the scars of the pandemic, which are adding to staffing shortages. The number of those out sick and unable to work hit 1.6 million in November; that left nearly 700,000 more people on the sidelines unable to work or seek work than in any month of the 2010s. Fatalities were larger here than elsewhere.

Consumer Spending Sputters 

We generated more than 4.3 million new paychecks year-to-date. That is double the annual pace of payroll growth in the 2010s. Those gains boosted aggregate income growth and buoyed consumer demand, even as individuals lost ground to inflation.

A rise in the ranks of the unemployed and retirees will reverse those trends. Even a small loss in employment could mean a drop of more than six million paychecks between 2022 and 2023.

Credit card debt and “buy now, pay later” loans (BNPL) are surging after consumers paid them down during the pandemic. That is further buoying spending but faces limits; debt service burdens compound rapidly when rates are rising. The use of BNPL to pay for groceries is a sign of economic stress.

The saving rate plummeted to 2.3% in October, tying the 2005 low when many used equity in their homes as ATMs. Excess saving from the pandemic is dwindling. 

The recession in housing is another headwind. Home buying and building are the single largest triggers to additional spending; we repair and remodel the homes we just bought. Those shifts are starting to reverse, with spending on housing-related goods falling.

Consumer sentiment and confidence measures both retreated in November, and are either at or on the cusp of recession territory. Buying attitudes about homes and big-ticket items that tend to be financed, including vehicles, plummeted.

Rate hikes accelerated the pivot in spending on goods to services; they made the things we finance less affordable and the time we share more attractive. The downside is that the pent-up demand for services is less a driver of growth than that for goods. Holiday parties canceled and haircuts missed due to quarantines cannot be replaced, while the backlog on weddings is shrinking.

Consumer spending is expected to slow but not collapse in the fourth quarter. A drop in prices at the gas pump could provide an extra lift in December. OPEC + has decided to hold but not expand its production cuts. The worst of the weakness is likely to be felt in the Spring, as layoffs mount.

Winners and Losers: Hotels, resorts and restaurants are expected to hold up better, given the pent-up demand for travel and tourism. It is unclear how strong that market will remain as businesses curb travel budgets. The opening of Asian countries to travel should offset that weakness.

Large retailers have already been squeezed. They have not hesitated to push the costs of inventory management and transportation onto their suppliers. That is pushing stress down the economic food chain to middle and small businesses.

Vehicle dealers, who were able to reduce the costs of inventories as sales outpaced production, will see costs rise. Insurance on vehicles surged, along with the rates on loans to finance inventories.

Media and entertainment companies and consumer product companies have the most exposure to short-term debt. They will feel the squeeze of higher interest rates along with other cost pressures on their margins. Layoffs have already accelerated at many news and streaming services. Advertisers are pulling back; competition among news providers has intensified.

Health care is in a category all its own. Providers are squeezed on all sides. Labor costs are accelerating, burnout is high and consolidation is picking up. Healthcare providers rely heavily on short-term debt.

Housing Losses Compound

Single Family Homes

The contraction in single-family home buying and building in the second and third quarters was the worst since the subprime crisis. Mortgage applications were still down nearly 50% in November, despite a slight pickup in purchase applications when mortgage rates dipped below 7%.

Single-family home construction is expected to drop another 15% in the first half of 2023. Home construction is expected to bottom out in the second quarter once mortgage rates start to come down.

Housing affordability hit its lowest level since the mid-1980s in October; more than half of all first-time buyers were unable to afford a home by March; buying conditions have worsened since then. Speculative investors are pulling back. All-cash buyers who flip to rent are waiting for additional price cuts.

Home values are falling the fastest in what were the hottest second-tier markets. Hiring freezes in the tech sector are exacerbating declines; many cheaper markets saw astonishing appreciation due to the higher salaries tech workers brought with them. The national index peaked in June.

We expect the S&P Core Logic Case-Shiller home price index to drop 20% on a fourth-quarter-to-fourth-quarter basis in 2023. That would mark the first national decline in the series since 2011 and push prices to December 2020 levels.

Better underwriting standards and a smaller jump in unemployment is expected to keep foreclosures in check; the cushion in equity is substantial.

Inventories of homes for sale remain extremely low. Existing homeowners with fixed rates are staying put. A stunning 40% of homeowners have paid off their mortgages. Older homeowners prefer aging in place.

Millennials are aging into their peak home buying years. That suggests that housing could quickly rebound once rates drop and values settle. A rebound in sales and construction before the end of 2023 is likely. Supply will depend heavily on how willing older owners will be to leave their homes.

Multifamily

Multifamily construction is poised to correct after several banner years. Multifamily construction soared to the highest levels since 1986 during the first three quarters of 2022. Multifamily construction is expected to fall more than 30% in 2023.

Multifamily building permits peaked in July 2022 but remained elevated through October. Projects in the pipeline are at their highest since 1973. The Senior Loan Officer survey by the Fed shows that major banks have pulled back on lending and are already down to recession levels.

Apartment vacancies remain low with space scarce. Of course, that could be said of the single-family market as well, but that did not stop prices from falling and the market from cratering.

The Housing and Urban Development rent index dropped to its least affordable level on record in the third quarter of 2022. That is decimating demand. Household formation slowed dramatically in 2022.

College grads pulled back, opting to stay with parents or take on roommates. Foreign students, who absorbed luxury space in urban areas, remain scarce.

High frequency data show that rents have rolled over and begun to fall. That hasn’t stopped sticker shock for those renewing leases. Rents are still up substantially from a year ago. We expect a drop in 2023.

That could add to the weakness in the multifamily market. Some projects will get delayed; others will go under. Vulture funds may get their chance to pounce. The weakness in the multifamily market could linger.

Winners and Losers: Cap rates remain low for multifamily but could rise with a drop in rents. Rental lease companies could see a slowdown in activity. Tighter credit standards could hobble developers.

Single-family home builders, realtors, mortgage brokers and manufacturers of appliances, furniture and construction materials are expected to be hit hardest. Layoffs at finance companies have picked up along with cuts in housing-related manufacturing activity.

Business Investment Softens

Equipment Spending Falters

Backlogs for light vehicles, heavy trucks and aircraft remain strong, while backlogs are returning to pre-pandemic norms elsewhere. Supply chain glitches are abating as delivery times have fallen.

Core durable goods orders rebounded in October after falling in September. Gains in computer and information equipment were especially large. The latter reflects an upgrade in equipment that handles more sophisticated, artificial intelligence (AI) and cloud computing.

There is some evidence that the ultra-low rates of the 2010s discouraged business investment. Big decisions on infrastructure were delayed. That sets the stage for a potentially stronger recovery on the other side of the slump we are expecting.

Our own KPMG Insights on Inflation survey in the fourth quarter revealed that more than three quarters of businesses plan to invest in labor saving technologies. They understand that labor shortages are structural.

The manufacturing indices slipped below 50, a sign of contraction, while many of the Fed’s regional manufacturing indices cratered. The Chicago Purchasing Managers Index predicted the last eight recessions; it hit recession territory in November.

Nonresidential Construction

Office leasing has slowed after the initial push to bring workers into offices. Demand for contingent space is rising, as firms manage peak days. Firms are focused on the most high-tech and energy efficient space.

Small businesses are pulling back the most. One recent poll revealed that more than a third of small businesses could not pay their rent in October, a sharp jump from September.

Cities in the Northeast and Midwest (Chicago) are doing better than those in the West. San Francisco has suffered some of the largest losses. Suburban office markets initially held up better than those in the major cities but are now losing ground.

The outlook for industrial space is mixed. Large retailers and manufacturers have no desire to pay for the costs of carrying and transporting inventories – so much for just-in-case inventory systems. They are pushing those costs onto suppliers.

Warehousing for the last mile of goods to reach a customer has held up better. Online spending has come off from the peak of the pandemic but is settling into a higher trend.

Retail space is experiencing a bit of a resurgence, despite a slowdown in spending on goods. Much existing space is no longer desirable or usable and will be demolished. A portion of planned upgrades are likely to be delayed until credit conditions ease. Those projects will fuel the rebound when rates fall.

The oil sector, which drove gains in nonresidential investment in the 2010s, has been slow to ramp up. Capital discipline, labor shortages and constraints on refining capacity are limiting investment.

Large energy companies are leaning on renewables to ensure their longevity. Government subsidies and the surge in private sector funds committed to the transition from carbon fuels are amplifying those shifts.

Inventories Drain

The impetus to hoard as prices surged and shortages compounded overstated demand. That left retailers with unwanted inventories. It is what is known as the “bullwhip effect;” we are now feeling the sting.

Manufacturing inventories are in better shape than retail inventories. Appliance producers cut production over the summer to avoid a glut; the next shoe to drop will be a broader draining of manufacturing inventories.

Supply chains remain fragile. Ports in the U.S. have begun to levy fees on empty containers, while China is curbing shipments of empty containers abroad. Those shifts, coupled with efforts by shipping companies to stem the drop in shipping costs, could interfere with export supply chains in early 2023.

Winners and Losers: The transition to renewables is a bubble in the making. Investors are betting on the sector before they know what business models will work. A similar phenomenon occurred when railroads were built and when the internet gained critical mass. 

Construction of chip plants and electric battery and vehicle plants are expected to pick up, given government incentives. Investment in AI and labor-saving technologies should help buoy spending on intellectual property and robotics.

Leasing companies and developers in the industrial space are expected to do better than those in the office space. Manufacturing activity is expected to fall, driven by losses in heavy manufacturing. Appliances, furniture, construction materials are expected to be hit harder, at least initially, than manufacturers of heavy trucks and aircrafts. 

Deal volume is expected to remain suppressed until rates begin to fall and financial markets rally. Large investment banks are hunkering down, despite banner profits. Pension funds are pulling out of less liquid, long-term investments. Valuations will remain suppressed until interest rates recede.

Tighter credit standards and restrictive loan covenants will exacerbate the pressure on small and midsize firms. Now is the time for larger, less leveraged firms to seek deals. Consolidation will accelerate.

Government Spending Up Modestly 

Federal

Federal spending is falling in the fourth quarter as Congress struggles to pass a budget or continuing resolution during the lame duck session. The continuing resolution gets us to December 16; that is expected to be extended to just before Christmas to pressure Congress to cut a deal on the now expired fiscal 2023 budget.

One of the biggest boosts to federal spending in early 2023 is the 8.7% jump in Social Security payments, which is slated to hit in January. That complicates the job for the Fed, as those checks will be spent. 

Defense spending is expected to rise in response to the war in Ukraine, but actual funds for Ukraine are much smaller than most realize. They are barely rounding errors in our national budget.

Subsidies and incentives for electric vehicles, battery and semiconductor plants are ramping up factories faster than the larger infrastructure bill. That will buoy investments in those sectors. The bulk of the infrastructure bill is expected to hit in the mid-2020s.

There is hope that Congress can get a resolution on the debt ceiling before year-end. The debt ceiling is an antiquated law that was never meant as a weapon of mass destruction. It merely ensures we service the debt on loans the government has already taken out, not new spending. The U.S. suffered a downgrade in the quality of its debt the last time there was a showdown over the debt ceiling in 2011.

The recent experience in the U.K. suggests that bond investors are less tolerant of such nonsense today; the mere threat to default on our debt could trigger a sharp depreciation in the dollar and a rise in rates.

State & Local

State and local government coffers are in better shape. Soaring tax revenues, the cost savings associated with the pivot of schools online and pandemic aid bolstered balance sheets.

Some of the windfall gains were used to boost rainy day funds. Investments in infrastructure, tax holidays (notably on gas) and rebates picked up. What is left will buoy spending at the state and local levels in 2023.

Winners and Losers: Climate change initiatives including funding for clean energy and incentives for electric vehicle plants will spur investments there. Semiconductor plants will receive large subsidies but the complexity of the supply chain will be a hurdle to achieving independence from foreign suppliers.

The Internal Revenue Service (IRS) will be ramping up unless their budget is cut again. The IRS desperately needs to modernize its systems as well as staff up. This is a sticking point for more conservative members of Congress and could represent a hurdle to a larger budget resolution, but staffing the IRS would pay for itself and reduce the annual deficit.

The weakness will be in domestic programs, which could be squeezed by the slowdown in funding relative to inflation. A continuing resolution is particularly restrictive, given the current inflation environment. That means fewer federal government contracts.

State and local governments have yet to spend their pandemic aid, much of it targeted to improve the infrastructure of public schools. Those projects span HVAC systems to repairs and upgrades to buildings.

Global Growth Weakens 

The global economy is expected to slip below 2% in 2023. That is recession territory for much of the world; it means that many countries will lose ground on a per capita basis.

Developing economies, which were the drivers of economic growth, are struggling along with many developed economies. China should pick up in 2023, given weak 2022 comparisons and an easing of zero-COVID policies but gains are expected to remain a fraction of what the country experienced in the 2010s.

China’s real estate sector remains over-leveraged. The government is attempting to blunt the blow with more targeted stimulus, but it is unclear how much it can accomplish. Exports, which are the primary driver of China’s economy, are expected to slow in response to weakness abroad and a decoupling of supply chains.

The pandemic and geopolitical tensions accelerated the regionalization of supply chains and “friend shoring.” Firms must be more careful about with whom and where they do business, rather than where the cost of production is cheapest.

ASEAN countries with younger populations are seeing an influx of foreign investment, which is helping them grow and accelerating the move away from China. Latin America, notably Mexico, also wins in that world. The United States Mexico Canada Agreement on trade (USMCA), which was upgraded to include intellectual property protections, makes trade with Mexico a safer long-term bet.

Smaller developing economies are in worse financial shape than larger countries. The need to subsidize food and energy has stressed government budgets; ten countries are already in, or have a very high probability of, default in the next year.

The concern is contagion and the risk that small fires could kindle a larger blaze. It was not on my bingo card that the U.K., a developed economy, would be one of the first to test the limits of what they could do with record tax cuts. The bond vigilantes are back.

The good news is that energy prices have come off of the peak hit after Russia invaded Ukraine. Weak global growth and a stockpiling of liquified natural gas (LNG) in Europe helped. The larger problem may be next winter when Europe has depleted what was left of the oil from Russia.

The largest headwinds are rate hikes. Central banks are raising rates the world over and are far from done. Those hikes will show up as additional weakness in 2023. The exception might be Latin America, including Brazil, which was earlier to hike rates.

Trade Deficit Modestly Narrows

A surge in the value of the dollar, the lags that are built into dollar-denominated contracts and a weakening of growth abroad suggest that exports will soften in the first half of 2023. Those shifts will dampen any improvement in trade related to a slowdown in imports early next year.

That marks a sharp shift for the trade deficit, which narrowed over the summer. Trade will not provide the buffer to growth it usually does in a recession.

Winners and Losers: Companies will be scrambling to hedge their currency bets and reprice imports. Corporate tax strategies may need to be revisited. Logistics firms should do well as companies adjust their outsourcing activities to a more protectionist and hostile geopolitical environment.

Foreign transplants, which rely more on imports to source their inputs, should do better than domestic producers. Multinational companies, which are more exposed to currency shifts and geopolitical risks, will lag. Heavy manufacturing tends to be hit the hardest by shifts in the dollar, which can take years to play out.

10-Year Treasury Note Yield at Constant Maturity, Percent

Inflation Slowly Cools

We expect the core personal consumption expenditures (PCE) index, which the Fed targets at 2%, to slow faster than the Fed expected in its last round of forecasts. A recession is the primary reason for cooler inflation:

Supply chain problems, which account for little more than half of inflation, are receding.
Commodity prices have come off of their highs and are now falling.

Home values and rents are cooling rapidly.

The problem is core service sector inflation outside of shelter. That category spans from spending on health care to education, haircuts and hospitality. The most recent PCE data revealed that those costs were still accelerating; a surge in the cost of labor is playing a key role in those gains.

History has taught us that the longer inflation remains elevated, the more it gets baked into contracts and becomes self-feeding. Workers begin to demand cost of living adjustments or COLAs in wages, while companies put escalators tied to the Consumer Price Index (CPI) in their contracts. The vehicle industry is renegotiating contracts next year and worried about the desire for COLAs.

The Fed believes that we need wages to slow to between 3-4% to ensure inflation does not become self-feeding. Average hourly earnings jumped back above 5% on an annual basis in November.

Fed Hits Brakes Harder

Chart 5 shows the forecast for the fed funds rate. The November unemployment report put a 0.75% rate hike back on the table but we think Powell and his colleagues will stick to a 0.5% hike in December and signal a higher terminal fed funds rate. The fed funds rate is now expected to peak at 5.5%, 0.75% higher than the Fed expected in September.

The Fed is expected to raise its estimate for unemployment and further reduce its forecasts for growth in 2023. The Fed currently does not plan to cut rates until 2024.

We expect aggressive rate cuts in the latter part of 2023, with inflation cooling in response to an actual recession. But don’t expect a return to zero rates anytime soon.

The Fed has concluded that the noninflationary rate of unemployment (NAIRU) has moved up with the pandemic. That means higher rates and higher unemployment on the other side of the current bout of inflation. That reality has yet to set in.

The Fed’s balance sheet has fallen by nearly $400 billion since its peak in June. Reductions in its Treasury bond holdings have fallen faster than its holdings of mortgage-backed securities.

Liquidity in the Treasury bond market has grown thin as the Fed has pulled back. It will likely have to stop well short of its goal to reduce the balance sheet by $3 trillion. Powell admitted as much in the question and answer portion of his most recent speech.

Treasury Yields Up, Markets Volatile

Chart 6 shows the forecast for 10-year bond yields. Bond yields are expected to peak in the second quarter of 2023.

The yield curve, or the difference between short- and long-term yields, has inverted. That can be a sign of a recession. The Fed’s reduction in its bloated balance sheet is exacerbating that signal. Our model of recession based off of the yield curve inversion shows the highest probability of a recession since 1982.

Stock prices should rally once an end in rate hikes becomes apparent. The problem is getting from here to there. A slowdown in demand, margin compression and higher rates are all expected to take a toll on stock returns in the near term.

Our model suggests that the S&P 500 could slip another 5-7% from recent levels before rebounding in the fourth quarter of 2023. The model shows the S&P 500 ending 2023 about 5% above where it was as of the writing of this report.

Bottom Line

The world is not wonderful but with a containment of inflation it could be much better than it is. The road from here to there is littered with potholes. Sectors of the economy that benefitted from the pivot online and shift to work from home are losing, while those that suffered the worst during initial lockdowns are winning.

Small and midsize companies and industries that rely more on debt are suffering, while large firms that locked into low rates are insulated. New business formation will slow, deal volume will remain suppressed and consolidation within industries will accelerate. The exception may be renewables, which are still in early development.

The pandemic accelerated many trends in place which catapulted us from a world in which growth and inflation were tepid and change was slow to one that is more volatile and requires more agility and resilience. That does not make it good or bad, just different. Firms that lean into those shifts will find opportunity; those that don’t will lag.

I will end where I started, with Louis Armstrong’s iconic hit. After sharing time with my 20-something children in recent weeks, one verse stood out:

I hear babies cry

I watch them grow

They’ll learn more

Than I will ever know

And I think to myself

What a wonderful world.

I know how heart-wrenching a cancer diagnosis is and how lucky I am to have caught several early. My kids proved a beacon of light in what seemed an ocean of darkness. May the economy be as fortunate, and our youth continue to inspire us with their brilliance. Happy holidays.