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Wall Street vet: Why the US economy is headed for a hoped-for ‘soft landing’ in 2023
- Strong action market continues. The economy enters 2023 with a strong and tight job market nationally, with 1.7 jobs available per applicant. Monthly job gains will slow from the 400,000/month rate we saw in 2022, to the 150,000-200,000/month range, which remains historically strong. Expect a strong job market in the first half of the year, with a slowdown in the second half of the year. li>
- Good inflation news. Inflation will continue to decline gradually. Global inflationary inputs such as oil, gas, commodities, economic conflicts in China, and supply chain issues are all trending lower. Expect this to continue.
- Wage gains to remain strong. The upward pressure in US wages will ease only slightly from the current range of 4.5-5%, despite higher Fed rates. America’s minimum wage earners are gaining influence for the first time in 40 years, and the demographics of worker shortages in nearly all sectors of the economy are working in their favor as well. li>
- Legislative law tail wind. The previous legislative measures and the huge sums of money accompanying them will provide a strong support to the economy, mitigating the effects of higher interest rates in the short term. li>
The Fed raises interest rates to slow growth only incrementally b> The Fed should take short rates to the 5.25% region and stay there for most of the year, up only slightly from current levels. This is the “inside rate” (expected by the markets), so while the rate should slow growth and reduce employment gains over time, there will be no impact or sudden deflation due to Fed policy. Conclusion: A soft landing dream may come true! A “soft landing” in economic parlance refers to an economy that slows from a rapid pace of growth, but does not slow down so quickly that it “collapses” and contracts sharply. Another thing to know about soft landings is that they are rare and historically very difficult to achieve. But this time, it might happen. The 2022 Fed payment theme will continue in 2023. What gives the economy the ability to softly land, as it stands, are those first four supporting factors mentioned above. There is a great balance in this equation in my opinion. The overall US economy is starting off in good shape, with plentiful jobs and subdued inflation. Wages for those at the lower end of the wage scale must continue to outpace inflation. The “push” will continue to mitigate the effects of higher short-term interest rates designed by the Fed, leading to a gradual slowdown in economic activity as the year progresses. Good soft! Greg O’Connor is a small business owner who spent 24 years trading bonds on Wall Street. He is the founder of REAL ECONOMICS on Youtube and lives in Mecklenburg.