GDP growth in the fourth quarter of 2022 was just reported to be 2.9%. That’s down slightly from the 3.2% growth in the third quarter. Since growth was negative in the first two quarters of 2022, growth for the entire year was 2.1%. That’s down significantly from the 5.7% gross domestic product growth rate in 2021.
Going forward it looks like a recession is coming. Already many large companies are reducing their payrolls in anticipation of the coming recession. In the tech industry, which saw rapid growth for most of the last decade, layoffs have been substantial. Amazon, Facebook Google and IBM have announced that they will lay off up to 5% of their workforce.
Much of what happens this year will depend on the Federal Reserve’s monetary policy. After the shockingly irresponsible expansionary policy in 2021 which was a major contributor to the record high inflation, the Fed began to tighten in 2022.
For whatever baffling reason, the Fed kept interest rates near zero and rapidly expanded the money supply all through 2021. This coupled with the huge $3 trillion federal government stimulus spending led to the inflation, which peaked at a 9% annual rate in June 2022.
The Fed finally and completely reversed its monetary policy last June and raised interest rates aggressively. Today, the Federal Funds Rate is up from the near zero in 2021 to nearly 5%. The Fed meets again next week and will likely raise rates at least another 50 basis points.
Going forward, the Fed will raise rates two or three times more by mid-year. That will take the Federal Funds Rate up to at least 6%. Many economists believe at this level inflation should finally be brought to a more acceptable level. The Fed would like to see the Consumer Price Index down to the 3% range.
That probably won’t happen this year. While the annual inflation rate is down to 6.5% from the 9% peak last June, inflationary pressures are building. Much of the reduction in the inflation rate was due to falling energy prices. Those prices fell mostly because China was in a recession resulting from its COVID lockdowns. Since China is the world’s second-largest economy, its poor economic performance reduced demand for energy.
China is now recovering, as it has ended its lockdowns and re-opened its factories. That is increasing worldwide demand for energy and raising prices. Oil prices have increased by nearly $10 per barrel since the beginning of the year. Domestic gasoline prices are rising. Last week, gas prices nationwide were up 12 cents per gallon.
Food prices area also continuing their rise. However, new and used car prices have stabilized. Home prices and rents are also seeing reductions in inflation. This was expected as the much higher interest rates reduced demand for interest rate sensitive products like cars and houses.
There is a danger that if the Fed softens its position and does not raise interest later this year, inflation could worsen. On the other hand, if the Fed maintains its aggressive position and continues to raise rates rapidly, the potential recession will worsen. According to Fed Chair Jerome Powell, reducing inflation is now the Fed’s top priority, meaning if Fed policymakers are going to err, they err on the side of over-tightening.
The federal government continues to run massive spending deficits which are forecast to exceed $1 trillion annually for the remainder of this decade. The only way that won’t happen is if Congress can reduce government spending. The Biden administration and the Senate believe that spending must increase to fix social injustices, provide more spending on other social programs and to fight climate change.
The House of Representatives believes that spending on social programs is already sufficient and that the impact of human activity on climate change is minimal. As such, the House wants to reduce spending to reduce this massive deficit problem.
Considering all this, GDP growth for 2023 will probably be lower than the 2.1% recorded in 2022. It could be much worse. It could be negative for the year.
Michael Busler is a public policy analyst and a professor of finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in finance and economics. He has written op-ed columns in major newspapers for more than 35 years.
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