The economic waters remain treacherous as we head toward 2023, and much of the focus has been on inflation and how to control it without tipping the US into recession.
Part of that plan, led by the Federal Reserve, involves closely monitoring GDP. If you’re wondering exactly what is GDP, it is simply a measure of the size and health of the economy. GDP stands for gross domestic product and is measured every quarter by the Bureau of Economic Analysis, using data on the value of a representative sample of goods and services, obtained by the Bureau for Labor Statistics.
Ideally, GDP should be growing constantly. But like any economist, trader or financial analyst, the officials at the Fed cannot look at just one indicator. In 2022, inflation was the pressing problem, and that is likely to be the case throughout 2023 and beyond. And when you’re trying to control inflation, too much economic growth may not be helpful.
US real GDP declined by 1.6% and 0.6% through the first two quarters of 2022, but it rose dramatically in the third quarter of the year, by 2.6%. So what does 2023 have in store for US GDP?
The GDP rise will not be sustained
The 2.6% increase in GDP for the third quarter of 2022 raised fears that GDP growth reflected an economy that was starting to heat up again, which would be bad news for inflation.
There is good reason to believe, however, that this 2.6% rise will not be replicated in 2023. Indications are that this GDP growth was caused by an unusually large figure for net exports, which hit a 42-year high. According to the Federal Reserve, this influence on GDP will decline in significance in the short term as economic growth in the major markets of China and Europe is likely to weaken.
GDP will not hit its potential
In 2023, this would be a good thing. The key question that the Fed and others have been wrestling with in 2022 is whether inflationary pressures on the economy can be slowed or reversed without tipping GDP into negative territory, which would constitute a recession.
So far, the signs are positive. The Fed took ‘fiscal tightening’ measures earlier this year and those are likely to continue to have an effect in 2023, hopefully keeping GDP at around 1% for the year. Consumer spending is expected to rise but this effect on GDP is likely to be balanced by weaknesses in other areas, most notably in housing.
Soft GDP growth will reduce demand for labor
The delicate balancing act the Fed is performing means that soft GDP growth is necessary to help reduce the demand for labor. A shortage of labor since the Covid-19 shutdowns of 2020 and 2021 has helped to drive up wages and hence inflation.
The indications so far are that the process of “job rebalancing” by which the gap between the number of vacancies and the number of workers closes is likely to continue through 2023, driven both by a decline in job openings and a slight rise in unemployment. Earlier in 2022, the jobs-workers gap reached a record high of 5.9 million but 2023 should see a gradual fall towards a figure in the low two million.
GDP will (probably) not fall below zero
A recession is officially declared when GDP falls for two quarters in a row. The US economy came close during 2022 and the danger of attempting to suppress GDP growth is that these efforts work too well and send GDP into decline. This would be the nightmare scenario for the Fed.
Fortunately for all of us, there are positive signs. Although the 2.6% GDP figure for the third quarter of 2022 was something of a blip, employment, consumption and industrial output are all still growing, and in the short term, there seems no prospect of GDP declining in a recessionary pattern.
Managing the economy, however, is as much art as science, and the real test for the Fed will come as 2023 goes on. The full effect of the monetary tightening they undertook in 2022 won’t materialize until 2023, and that will be when the economic headwinds will be at their strongest. In order to avoid the calamity of a recession, the Fed faces another difficult 12 months attempting to navigate the post-Covid world, with millions of jobs, businesses and livelihoods on the line if they get it wrong.
