If the economies of 2020 and 2021 were dominated by the covid shutdowns and the subsequent opening up, 2022 was a year of shocks and aftershocks.
The economy is still clearly one reckoning with covid-19 — a smaller portion of the population is in the labor force, and the in-person economy still has not recovered to its pre-covid strength. But 2022 brought its own unique challenges too, namely a Federal Reserve responding to inflation with the steepest interest rate hikes in decades and a European war between major exporters.
The economy started this year hot, hot, hot. Employers were snapping up labor, and their wages were rising accordingly. Home builders were throwing up everything they could while home sellers were seeing price growth they couldn’t believe — and home buyers took advantage of the last few months of low interest rates to snap up more and more housing across the country.
The Federal Reserve did what it could to put an end to all that. It started raising interest rates in the spring, and the housing market felt the brunt of it. Home sales plummeted, builders stopped building, and stock prices continued a fall that started late last year.
But the shocks to the economy weren’t just internal.
When Russia invaded Ukraine, the entire global commodities market went haywire. Russia and Ukraine are both massive exporters of agricultural commodities like wheat, while Russia itself exports (or exported) a huge amount of oil and natural gas. Gasoline prices shot up, as did global food prices. And while the Fed had firmly shifted into inflation fighting mode by the summer, its policies take time to have an effect on the economy. All this added up to the biggest annual increase in prices since the early 1980s, with inflation getting just over 9 percent during the summer.
While inflation is still high, it has dramatically come down at the end of the year, with monthly readings showing little increases in prices, thanks largely to the price of gas and goods coming down, even as wage growth remains historically hot.
That’s because all the while, the job market chugged along, even as the economy technically contracted, according to the gross domestic product figures. While job growth now is a fraction of what it was earlier this year, the monthly numbers in the last quarter of the year would have been the envy of any time between 2010 and 2020.
Looking to the new year
So where does this leave the economy in 2023? Many analysts and economists have long predicted a recession sometime next year, but as of now, the economy is continuing to chug along. One reason many forecasters are pessimistic is because substantial lowering of inflation typically brings along a recession as Federal Reserve interest rate hikes put a chill on the economy.
So, the biggest question for 2023, as it has been most of this year, is inflation. Will it continue to fall, and if it doesn’t, what will the Federal Reserve be willing to do — and willing to risk — to make it happen?
Thanks to Lillian Barkley for copy editing this article.