- by New Deal democrat
In the summer of 2021, looking at the long leading indicators, I wrote:
“while the long leading indicators confirm a firm, even strong expansion through the remainder of 2021, by spring of 2022 they are neutral, suggesting a much softer economy, although not a recession before the midyear limit of this forecast.”
By the beginning of this year, the long term outlook transformed into the short term outlook, which was:
“The short leading indicators now confirm the positive trend through the first half of this year, with very little evidence of softening at this point.“
Meanwhile I took my first look at the longer leading outlook for the 2nd half of this year
“ If 6 months ago the long leading index forecast a weakening, but still positive, economy by roughly midyear this year, they forecast an outright stall by year end 2022.”
As we know now, we got the complete stall - perhaps even a mini-recession - in the first half of this year, and growth picked up in the second half.
So what happened? This brings us to the three graphs that defined the economy this year.
By far the most important is this first one, showing oil and gas prices:
Prices had already been gradually heading higher, outside of the 2020 lockdown period, for about 5 years. Then, with the Russian invasion of Ukraine in February, oil prices, immediately followed by gas prices, rose by over 50%, peaking in early June. As the situation there stabilized, and Europe’s dependency on Russian gas was successfully decoupled, prices fell almost as quickly. As we end the year, gas prices are at the same level as they were 18 months ago.
This was a textbook oil shock. It took an economy which was already slowing, and threw it briefly into reverse (albeit a minor one). Then, as the shock reversed, economic activity, especially by consumers, picked up again.
The second graph is one I have run many times for over a year, comparing house prices with owners’ equivalent rent in the CPI:
Just as I first forecast over a year ago, the big increase in house prices started showing up in the fictitious owners’ equivalent rent, with a one year delay, dragging core inflation higher along with it, even as house prices slowed down and then peaked during the summer. As we end the year, house prices are declining, but owners’ equivalent rent has yet to peak.
Which brings us to the third graph, which is the YoY change in the Fed funds rate:
As it chased inflationary pressures that were manifest in 2021, the Fed raised interest rates by over 4% in just 9 months, the fastest rate of increase since Volcker’s recession of 1981. These interest rate increases have created recessionary sales numbers in the housing industry, caused banks to tighten lending standards, and to some extent countered the expansionary effect of the declines in the price of gas.
As we end 2022, gas prices are likely to stop declining soon, if not already now, while the effects of even the first of the Fed rate hikes last spring has not fully made their way through the economy. Industrial production and retail sales have stalled, while real manufacturing and trade sales and personal income less transfer payments are still below their peak levels earlier this year. Only jobs and wider consumer spending have not rolled over. These will likely be the big focus in the earlier part of next year.
As to which, my short term and long term forecasts for 2023 will be posted at some point during the next month.