3 scenarios for the US economy in 2023

Today is November’s last day, and you can already sense the smell of holidays in the air. The last trading month of the year has traditionally been slow for financial markets, particularly the second half of the month.

As such, December is the month to plan for the year ahead. Markets move based on technical and fundamental factors, so being able to interpret the macro environment is part of successful investment.

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How will the world’s largest economy perform in 2023? Here are three scenarios based on growth, inflation, and the Federal Reserve’s monetary policy.

US economic growth

Fears of an upcoming recession have gripped financial markets lately. Going into 2023, a positive scenario for US economic growth would have employment and wage growth to slow.

Effectively, it would mean that Fed will hike less, making any economic downturn shallow.

On the other end of the spectrum, the risk comes from the housing market. The 2022 Fed hikes may lead to the housing market collapsing.

Finally, the base case scenario is that the US economy will enter a mild recession in the first half of 2023.

US inflation

The base case scenario for US inflation is that core inflation remains sticky, but as inventories rise, inflation will slow through 2023.

The risk here is that energy prices may rise in 2023, leading to further upside in the prices of goods and services. On the positive side, if shelter inflation falls, together with lower energy and vehicle prices, then inflation might register a significant drop in 2023.

Federal Reserve’s monetary policy

The Fed will have a tough job in 2023. The market has priced in a hike to 4.5% in December 2022 and further hikes to a terminal 5% in February 2023.

But the risk is that the Fed might face sticky wage growth and a resilient job market. In this case, if the Fed cuts in late 2023, the US could not avoid a recession.