2022 ends on an up note and the new year is looking even better
By Joe Higgins, YSN Contributor
- The U.S. economy added 223,000 jobs in December, against expectations of 202,000
- The unemployment rate fell to 3.5% from a November high of 3.7%
- Wage growth came in at an inflationary 4.6%, pushing the Fed to continue rate hikes
At last March’s BrandSource Summit in Las Vegas, our dealers faced rising inflation, a war in Ukraine, the banking community solidly predicting a 2022 recession and the threat of a job market collapse. The Federal Reserve had already committed to extensive interest rate hikes during the year, which should have slowed regular economic activity even more than anticipated.
At last August’s Conventon in Dallas, I predicted that unemployment would end the year at 3.3%, that consumers would continue to spend in the face of the Fed’s restrictive actions, and that we would avoid a recession. So now that the final assessments are in, where does our economy stand?
Last week the year-end jobs report came out with job creation numbers at 223,000 and the unemployment rate at 3.5%, indicating that the labor market was solid all year, even with the highest interest rates since 2007. Economists’ expectations were for 202,000 jobs and an unemployment rate of 3.7%. Average hourly earnings were up 4.6%.
So just a quick review: In a year that the so-called experts predicted would slide slowly into recession, the U.S. economy added 4.6 million new jobs and the unemployment rate dropped to a 53-year low of 3.5%. Consumers continued to spend, the Conference Board’s Consumer Confidence Index ended the year at a solid 108 and inflation fell from a high of 9.1% to 7.1%. Even better news for our dealers was that gasoline prices in most markets dropped nearly $2 a gallon by the end of 2022.
The other good news is that Fed Chair Jerome Powell’s so-called “soft landing” (reducing inflation by slowing the economy while keeping it out of recession) now seems like a possibility, albeit a slim one. It is hard to go into a recession with an unemployment rate of 3.5%. Wage growth came in at 4.6%, and wage growth will continue to increase as 23 states raise their minimum wage levels, affecting over 8 million workers. Substantial job gains and higher wages are in themselves inflationary.
This year, monthly employment gains have slowed from an average of 383,000 to 223,000 in December. While that is the progress the Federal Reserve has envisioned in reducing employment in order to lower inflation, it has not been enough to stem rising wages and bring inflation down to the 2% level the Fed is looking to achieve.
The Fed has only two mandates: full employment and low inflation, and over the past year it has been willing to fight the war on inflation at the expense of jobs. So, more Americans may be unemployed by the end of 2023, which interferes with the soft landing scenario if layoffs get out of hand.
Here is my assessment of inflation in 2023: I expect the Consumer Price Index to drop to 6.3% this month from 7.1% last month. As a result, the Fed will cut back on the size of the interest rate increases going into the first half of this year. Still, prices in some sectors will continue to rise, especially energy and food.
Gasoline prices, which have seen a dramatic drop since September, could swing back up as China’s new zero-COVID policy increases oil demand. The weather also impacts energy prices, and globally, it has so far been a relatively mild winter.
The war in Ukraine is impacting wheat exports, driving food costs globally. Drought across the Southwestern U.S. dramatically affects the farmers who grow vegetables, fruits and nuts. In many states, the lack of water is also causing cattle ranchers to cut their beef herds. Food costs are therefore increasing across the board and I do not see any changes in this situation in the first half of the year.
Housing prices are now declining, according to Zillow. Prices peaked in July and have fallen for five consecutive months due to mortgage rates at 7%. Nearly 56% of homes listed last month had price reductions, which is a stiff contrast to when there were multiple offers on each sale. There is still a shortage of homes in America, so my advice is if you have a house, keep it.
The cost of a hotel room in most markets is down 12%, but a hotel meal is up 22%. Prices on restaurant menus are up 19% and show no sign of easing.
TSA lines during the holidays were about even with 2019, substantially busier than the pandemic years. The future price of a plane ticket is hard to predict as the airline industry faces a pilot shortage, the crush of training new workers and the possibility of rising jet fuel costs.
In our business, the cost of appliances leveled out in the second half of 2022, and if manufacturers go after market share we will see falling prices in 2023. Electronics pricing was pushed higher after the pandemic’s start and has now receded, and that trend should continue through 2023.
The Bottom Line
I think the chances of a recession this year are 50-50, although if we do end up in a downturn, I think it will be like the recession of 2001 — most of us will not even know it happened.
I hate to end my column with unwelcome news, but the new COVID variant, XBB.1.5, is the most contagious of the coronavirus family and already has many hospitals at capacity. According to the CDC, this variant has comprised 40% of all the COVID cases in the country since mid-November. Over the next 30 days we should have a better handle on its economic impact. COVID-19 has been and remains the wildcard and is still a leading economic indicator of our economy.
Joe Higgins is a 46-year veteran of GE and Whirlpool Corp. who brings his executive experience to bear as a business consultant, AVB keynoter and YSN contributor. Visit his website, Quest 4 Quality with Joe, at www.q4qwithjoe.com.