Where we were a year ago

As we began 2022, our economic outlook discussion was focused on pandemic supply chain challenges, inflation and whether or it would be transitory, expected interest rate hikes, and a hot housing market. Now it’s time to look ahead to 2023.

In the 21st episode of our Sharing Knowledge Series, host Kevin Vonderau, chief lending officer at Westfield Bank, sits down with Jon Park and Brian Toma, CFP®, AIF®, CEPA to offer predictions for 2023 and provide guidance to business owners who are bracing for a possible recission. Jon founded Westfield Bank in 2001 and has remained as executive chairman since he retired as CEO in 2021. Brian is managing partner and a registered investment advisor at Freeman Heyne Toma Financial Advisors.

Investment products: 

• Are not FDIC insured 
• Are not bank guaranteed 
• May lose value
• Are not a deposit 
• Are not insured by any federal or state government agency

Below are the key takeaways from the discussion with Kevin, Jon, and Brian. You can also watch or listen to the full episode here.

Jobs are up, markets are down

In a nutshell, the economy heading into 2023 is a mixed bag. While the unemployment rate has remained low, government stimulus during the pandemic has led to inflation and rising interest rates throughout 2022. The conflict with Ukraine has disrupted trade around the globe, yet our supply chains have managed to catch up with our demand. And despite the high inflation, Americans are still spending money. 

“I think the Fed failed us,” Brian says about the Federal Reserve’s slow response to the government stimulus and inflation that followed. In his opinion, interest rates should have been raised starting in 2021 at a more incremental rate. “We had the world’s largest increase in the money supply in 2020 and 2021, and now we’re paying the price for that,” Jon adds.

Jon also hopes that more policymakers will get serious about balancing the budget – we’ve been in an era where nations are deficit spending and issuing more debt. With rising interest rates, that’s going to become problematic, he says. As our government’s debt reprices, the percentage of our tax revenue that it will take to pay the interest will increase at a rate that we can’t afford to pay - leading us to even more debt.

So, where are we heading?

“Only when the tide goes out do you learn who has been swimming naked,” Warren Buffett once famously said. Brian believes rising interest rates and inflation will expose risky business models that have become more common in recent years, and possibly impact the economy further. Jon agrees that deleveraging and de-risking could be crucial, and an opportunity for the markets to rebound and correct themselves as part of a natural economic cycle. 

Another part of this reality is the heightened risk of a recession beginning in 2023.  While there are positive aspects of the economy, more and more indicators are starting to point towards a recession, most notably how fast interest rates are rising. Jon puts his prediction for the U.S. simply: “it’s not going to be a painful recession, but it’s going to be a slow, long recession.” 

Perspective also matters here. It can be argued that inflation is simply in the process of returning to a historically normal range, given how long interest rates were at near-zero levels. Brian points out that “because [the high interest rates] got here so quickly, it feels like a knee-jerk reaction. We’re not in a bad place in the grand scheme of things.”

When the economic forecast is discouraging, Brian reiterates his consistent piece of advice to consumers and business owners: “you’ve got to have a dream team, a team that’s rowing in the same direction as you. You can’t go at it alone. Surround yourself with professionals who you trust and who know your goals,” including an accountant, attorney, financial adviser, and banking partner. “Know the risks you can afford to take,” he adds.

Jon’s message if you are worried about the future is to focus on what you can control, especially risk management. Work with your banking partner to consider available tools including cash sweep, positive pay, and other cybersecurity enhancements for your bank accounts. As cyber criminals get more sophisticated, ramping up your security measures and checking your accounts for suspicious activity daily is critical to avoid monetary losses.

Economic indicators to consider

There are several markers and indexes to look at when gauging the state of the economy and where things are likely heading including, inflation rate, consumer spending, and consumer sentiment. Here are some of the most meaningful economic indicators that are worth tracking in 2023:

• Gross domestic product (GDP): GDP can be looked at in terms of both dollar amount and percentage change – and throughout 2022, both have been increasing which is a sign for optimism and economic strength going into the new year.
   
• Unemployment: the U.S. has seen low unemployment rates during 2022. While there are different ways to look at this, it’s worth focusing on the amount of people in the U.S. who are currently working – and this number has been increasing.
   
• Stock market performance: for 2023, specifically, this might be the best barometer of how the economy is doing at a given moment. People can expect the market to fluctuate quite a bit.
   
• The Big Mac index: have some fun and simply compare the price of a Big Mac in one country to the price in another to get a sense of how strong a country’s currency is at any given moment.

Interest rates and affordability

It’s hard to have a conversation about interest rates without considering its impact on housing affordability and commercial real estate valuations. A continued rise in interest rates will decrease the purchasing power of the average home buyer. Jon predicts that valuations and some asset prices will drop over the next year. It’s possible that housing prices will decrease in value by up to 20 percent in 2023, which seems like a lot, but it’s worth noting that home values jumped by this amount in 2020.

With banks doing their due diligence on mortgages, Brian reassures that the situation in 2023 won’t look like the housing market crash in 2007 - 2009. 

The bottom line

Yes, 2023 is likely to bring a recession. But business leaders and consumers have reasons to stay optimistic that the U.S. economy will emerge stronger than before. Stay the course and control the factors that you can, and your financial goals will remain within reach.

Westfield Bank remains committed to providing you with expertise and partnership needed for longevity. Through times of prosperity and times of challenge we are your business’s trusted financial partner.

Article resources

¹ FHT Advisors (2022). 4Q 2022 Market Outlook – Is the Fed Fighting the Ghost of Inflations. Retrieved 2022 from https://pages.cetera.com/marketoutlook1.