This past year was a historic one for the economy as the Federal Reserve and inflation dominated headlines and fears of a recession proved unfounded — at least for the time being.
Rolling into 2023, inflation was still punching in at 6.5% — double what it is now. The Fed was still desperately raising interest rates, sometimes at three times the magnitude as is typical, as it looked ever more likely the economy was going to start tanking and unemployment was going to start rising.
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But this year has been a lot different than what was expected. The overall resiliency of the macroeconomy might have been surprising, but there have been some other shocks in 2023, including the collapse of some major banks, historic labor strikes, and a rebound for flagging cryptocurrencies.
Inflation falling but still hurting consumers
Inflation has largely trended down over the past year, with the exception being a few stagnant months over the summer. The consumer price index is now clocking in at 3.2%, and it appears on track to keep falling into 2024.
The lower inflation readings are a result of the Fed raising interest rates. At the start of 2023, the Fed’s target rate was 4.25% to 4.50%. Over the course of the year, the Fed raised that to the 5.25% to 5.50% level it is at now. Most indications are that the central bank is done tightening and will begin cutting next year, although Fed Chairman Jerome Powell has left the door open to anything.
While inflation is nearing the Fed’s 2% goal, it is still causing consumers pain. Prices are still going up, and people are paying far more today for basic goods and services than before the pandemic took hold.
Inflation is likely still the major factor clouding surveys about economic well-being. Despite the lack of a recession, strong GDP growth, and the ability to easily find a job, people are concerned about the economy.
A recent CNN poll found that 71% of people rate current economic conditions as poor. That doesn’t bode well for President Joe Biden, who has shouldered much of the blame for the country’s economic discontent.
The White House has worked to brand some of the positive spots of the economy as “Bidenomics,” although the push hasn’t really made headway with voters. In a recent survey that asked small-business owners whether “Bidenomics” has been good or bad for their companies and overall economy, just over 1 in 4 said it has been good, while 66% said it has been bad.
Housing market hits turbulence
An unfortunate side effect of the Fed raising its rate target in order to drive down inflation is that the interest rates of various loan products have surged. Mortgage rates in particular have exploded and sent shock waves throughout the housing ecosystem.
Mortgage rates peaked at above 8% in October but have dropped a bit since then. The rate on a 30-year, fixed-rate mortgage has since fallen below 7%, according to Mortgage News Daily, which tracks daily changes in rates.
That is more than double what mortgage rates were during the height of the pandemic and well above pre-pandemic norms. The higher rates have made housing more unaffordable and taken home ownership out of the realm of possibility for many people across the country.
Demand for home sales has fallen as a result, although because of low inventory, housing prices have not gone meaningfully lower, a scenario that is a one-two punch for consumers looking to buy.
Recession fears fade, though uncertainties remain
The United States was able to sidestep a recession this year. Many thought it a near-impossibility that the Fed could pull off a so-called soft landing, a scenario in which inflation falls without a major economic contraction. But it appears more and more likely that a soft landing is quite possible.
Rather than slowing, GDP growth has increased this year, a surprising and welcome development.
A revision to the third quarter GDP projections released last month showed that economic growth expanded at a 5.2% seasonally adjusted annual rate in the third quarter of this year. GDP growth was 2.1% in the second quarter and 2.2% in the first quarter of this year.
Still, the path ahead is uncertain. Some forecasters still expect a mild recession in the beginning part of next year, although, as could be seen with how previous recession predictions for 2023 turned out, forecasting economic growth is tough.
The labor market has also held up well. The U.S. added jobs every month of 2023 and unemployment was at historic lows for much of the year despite expectations to the contrary. The pairing of strong economic growth and a healthy labor market has been good news for the country.
SVB collapse sends jitters through banking system
One unexpected development in 2023 was the sudden collapse of Silicon Valley Bank in early March. The failure was the largest since the 2008 financial crisis.
SVB’s collapse sowed turmoil in the banking system and sparked fears that it could start a contagion leading to a chain of failures. Since SVB’s downfall, other banks have met their demise, but the fallout was contained in part through the federal government’s decision to back all deposits in Silicon Valley Bank and Signature Bank, which also failed, including those in excess of the Federal Deposit Insurance Corporation’s $250,000 threshold.
The SVB failure didn’t just affect U.S. financial markets but also those in Europe.
UBS agreed to buy out fellow Swiss competitor Credit Suisse after investors in Credit Suisse began to flee the firm amid turmoil. UBS paid just over $3 billion for Credit Suisse, a mere fraction of the firm’s estimated value.
Bitcoin ends year with a bang
Cryptocurrency enthusiasts had a great 2023 after 2022, highlighted by the collapse of FTX, created massive losses for investors. Since the start of the year, bitcoin has posted remarkable 163% gains, nearly erasing the hole that was made the year before.
Some of bitcoin’s recent growth and the possibility of more growth heading into 2024 is the possible approval of the first bitcoin exchange-traded funds.
The Securities and Exchange Commission is still mulling over the decision to greenlight about a dozen such applications, and many in the crypto community think that it likely will give them the OK, something that would be a shot in the arm for the digital asset.
2023: The year of the union
This past year has been a banner one for organized labor.
United Auto Workers conducted historic strikes at dozens of Ford, GM, and Stellantis plants across the country, with the work stoppages lasting weeks. A deal was eventually reached, and it seemingly favored the union, with hard-line UAW President Shawn Fain declaring a “victory.”
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Earlier this summer, UPS was top of mind as the Teamsters pushed negotiations right up to the deadline for a strike. A strike would have reverberated through the economy and roiled supply chains as some 6% of the country’s GDP travels through UPS, and the labor contract represents the largest private sector union agreement in North America.
Biden has cast himself as the most pro-union president in history, so as he heads into the 2024 election year, he will likely campaign on those bona fides, and the negotiations at UAW and UPS, as proof of his commitment to blue-collar workers.
