Will 2023 be a good year

Arizona-based economist Elliott Pollack, CEO of Elliott D. Pollack & Company, spoke to a crowd of commercial real estate professionals on Friday, Jan. 14 at the IREM CCIM Economic Forecast. Pollack covered a wide range of topics, from supply chain issues to inflation.

“The economy continues to recover at a rapid rate,” Pollacks says. “But the recovery will be erratic and there will be some glitches along the way.”

Pollack notes that the status quo is unlike a typical business cycle and shouldn’t be compared to one. A recession was not induced by the Federal Reserve because the economy needed to be slowed, but because the government chose to shut down the economy almost completely. This affected the service industry hardest and had a ripple effect that disrupted other sectors.

READ ALSO: Here is the Phoenix commercial real estate outlook for 2022

Despite the challenges, Pollack predicts that 2022 and 2023 will be a good year for the economy, though the latter won’t be as robust.

“Here’s why I’m so optimistic — consumers are in the best financial shape they’ve been in for decades. They’re awash with cash, debt levels remain low and jobs are plentiful. There’s also a positive wealth effect from the increase in 401(k) values and house prices,” he says.

State of the Economy

Since the onset of the pandemic, consumers now have about twice as much money on hand, rising from approximately $1.5 trillion to $3.5 trillion. Adding to the consumer-friendly environment is the ease of finding work. Pollack notes that there are almost 11 million unfilled jobs in America and about 6 million people are unemployed.

“You’ve got almost twice as many job openings as you have unemployed. That has never happened in the history of America before,” he says. “The number of people quitting their job has jumped like crazy. Why? Because jobs are so easy to get. Quite frankly, if you’re not working today, you don’t want to work.”

The labor participation rate has dropped fastest among women, workers without a college degree and those in low paying service industries. Pollack believes that these groups will start looking for jobs again once any built-up savings from stimulus checks and child tax credit runs out. Workers over 55, he says, are also likely to retire early thanks to the strength of the stock and housing markets.

Despite plentiful jobs and elevated savings levels, consumers are unable to spend the same way they did in 2019. Closures and pandemic-related reluctance to be in crowds means more money is dedicated to goods rather than services, which has led to anemic inventories and empty shelves in stores.

“It’s a worldwide issue. Something happens to a plant in Sri Lanka, China or South America and it affects us because they’re making a vital component to something we produce. It’s going to take a while to fix,” Pollack says.

Gross domestic product (GDP), a common measure of a country’s economic well-being, will slow due to a shortage of products but will speed up as capacity comes back online — what Pollack calls a “postponement” of GDP growth. Still, the disrupted flow of goods has created upward pressure on prices that will fall once the supply chain is repaired, though price increases won’t be completely erased.

Another factor affecting spending habits is inflation. The U.S. Bureau of Labor Statistics reported an 0.5% increase in inflation for December 2022, with the last 12 months showing a 7% inflation rate — the largest 12-month increase since June 1982.

“The government continues to inject liquidity into the system while holding rates low and spending trillions. Our policy response has more than made up for incomes lost during the COVID lockdown, probably by a factor of three,” Pollack says. “What they didn’t replace was the ability to produce goods and services. So, you’ve got all this money, but what are you going to spend it on? That brought to light some of the weaknesses in the supply chain as demand everywhere surged.”

The Fed can curb demand by raising interest rates and making it more expensive to borrow money for a car or a house. Indeed, the Fed indicated it will slow the purchase of assets and potentially enact three rate hikes in 2022.

“My conclusion is that you shouldn’t panic,” Pollack contends. “Unless there are some very big political decisions that affect the economy, a black swan event or a dramatic, unexpected increase in interest rates, the economy is good through ‘23. No matter what happens, Phoenix will continue to be one of the strongest markets in the U.S.”

University of Michigan economists Thursday said a mild recession is likely ahead in 2023, as the Federal Reserve continues to raise interest rates to try to cool down inflation.

The Federal Reserve, which has been aggressively raising rates this year, is "prepared to tolerate a mild recession" to combat rising prices, according to the economic outlook by the U-M Research Seminar in Quantitative Economics.

Inflation is expected to "tick back up" in the next few months. The Fed is expected to keep increasing interest rates through mid-2023. "And it will likely take a mild recession to drive inflation down for good," the report noted.

"We think the current momentum in the labor market and consumption spending is strong enough to keep the economy from turning over for a few quarters," said Daniil Manaenkov, U.S. forecast lead at U-M’s Research Seminar in Quantitative Economics.

Mortgage rates have soared significantly, though, leading to a dramatic, troubling fallout in the housing market. The U-M report refers to a "nuclear winter in housing."

"After a two-year period of eye-popping increases in house prices," the report stated, "the housing market appears to have run into a brick wall."

Mortgage purchase applications tumbled by 45% from early 2022. The University of Michigan Survey of Consumers' sentiment index indicated that conditions for buying a home have fallen to their lowest reading since the survey's inception in 1951.

The average 30-year mortgage rate climbed to 7.08% as of Nov. 10, according to data from mortgage buyer Freddie Mac. That's up from 3.22% during the first week in January.

Mortgage rates fell back to 6.61% based on data released Nov. 17. Mortgage rates don't directly track the Fed’s rate hikes. Instead, mortgage rates follow the yield on the 10-year Treasury note, which is influenced by inflation expectations.

The downturn in housing, Manaenkov said, is likely to drive businesses to be more cautious due to deteriorating economic projections. Banks are likely to tighten credit further and households are bound to cut back spending and increase savings. All will drive a fading momentum for the U.S. economy, he said.

More:Fed hikes interest rate again by 75 basis points as inflation refuses to cool

After the Fed's latest rate hike in early November, the short-term federal funds rate now runs in the range of 3.75% to 4%. It had been close to zero before the rate hikes began. The Fed is expected to raise rates, possibly by 50 basis points according to some forecasts, at its next meeting Dec. 13 and Dec. 14.

The U-M forecast anticipates that the Fed could start cutting short term interest rates by early 2024, which would help to stabilize the job market.

More:Is a recession inevitable in 2023? What the experts are saying

Michigan's auto industry, though, could end up being better off than in previous recessions, according to the report, thanks to a backlog of demand that will help car and truck sales grow in a tough economy.

The U-M forecast calls for car and light truck sales to grow to 15.5 million by 2024 — up from 13.9 million in 2022 — as supply chains improve and inventories continue to normalize. The forecast calls for 15.1 million cars and light trucks to be sold in 2023.

The auto industry's shift to electrification, the economists said, should support labor demand with investments in assembly and battery production plants.

"If the auto industry is able to avoid major potholes ahead, it could end up towing the state's labor market forward along with it," according to the Michigan Economic Outlook.

Michigan's construction and nonautomotive manufacturing industries face a "challenging environment with rising interest rates, a strong dollar, and weak national growth," the report noted. "We are hoping that continued strength in the automotive sector will shield Michigan from the brunt of the recession."

Michigan's unemployment rate is forecast to hold steady at 4.1% through the middle of 2023. It it expected to hit 4.7% by early 2024. But U-M economists say the Michigan jobless rate will begin declining again in late 2024, as the national economy improves.

Contact Susan Tompor: . Follow her on Twitter @tompor. To subscribe, please go to freep.com/specialoffer. Read more on business and sign up for our business newsletter.

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