Economic Outlook: Ignore the Headlines

• December 20, 2022
• Carey M. Heyman, CPA

Recession is a word that comes up consistently in conversations about the 2023 economy.  But next year’s outlook is far more complex than “will there be a recession or not?”

While higher interest rates may lead to a slowing of economic growth, CLA Wealth Advisory does not see a repeat of the severe downturn last seen during the Great Financial Crisis (2007 – 2008).  In fact, CLA Wealth Advisory foresees companies maintaining healthy profitability in 2023.

Economic Tailwinds and Headwinds

There are a lot of factors at play with the economy, including both tailwind and headwind economic indicators.  Consider the following factors as we look ahead to 2023.

Positive Tailwinds

• Many Wall Street analysts are forecasting growth in business profitability.
• Robust consumer spending (approximately 70% of GDP) is expected to continue, while inflation is likely to continue to trend lower.
• In November, unemployment rates continued to drop from the prior year.
• Through November, national jobless rates remain at 50-year lows.
• Attractive valuations in equity, fixed income, and alternative markets continue to be available.

Concerning Headwinds

• Slowing GDP growth is expected in 2023.
• Tight labor markets and the rising cost of capital may challenge unprepared business owners.
• The average 30-year mortgage rate was 6.9% in October, representing the largest rate over the past two decades. 
• More restrictive credit conditions are expected as the Federal Reserve continues to withdraw liquidity in a bid to fight inflation.
• Asset values are expected to decrease in 2023 with weakening fundamentals and higher cost of capital. 

Economic and Market Recommendations

What does this mix of tailwinds and headwinds mean?

For business owners

• Despite higher interest rates and slowing economic growth impacting areas such as housing, consumer spending and labor, markets are resilient.  Generally speaking, businesses should be managed the same way as they have been in the past.
• For those feeling the pinch from top-line price increases, expenses should be carefully managed to drive bottom-line growth. This includes focusing on technology to drive efficiencies and preserve margins and embracing outsourcing to satisfy labor needs.
• Businesses that are able to weather a “liquidity crunch” brought on by the Federal Reserve’s continued tightening of credit conditions may be rewarded in 2023.

For investors

• Ignore the headlines, which continue to focus on a looming recession. The underlying data shows a much more neutral outlook.
• The market sell-off appears to be exacerbated by fear, rather than fundamentals, which can create opportunities for investors.
• Investment decisions should incorporate a holistic approach that considers all factors of the economy – business, industry, policy, and markets. A multi-faceted outlook can make a significant difference in investment decisions.
• The focus should remain on high-quality investments.  This strategy is a solid way to navigate market volatility, as high-quality companies often endure economic slowdowns.

With a complex outlook on the horizon for 2023, business owners and investors could benefit from CLA Wealth Advisory’s insights into the spectrum of economic indicators that could impact a portfolio. Well-constructed portfolios can participate in market upside while mitigating volatility in order to help achieve investment goals.

Thank you Chris Dhanraj for authoring this post and for all that you do for CLA Wealth Advisory!

Sources: Bureau of Labor Statistics, Freddie Mac and CoStar

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