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Economic Outlook for 2023: What Can We Expect?

2022 was a bumpy year for many businesses as they continued to navigate record high inflation, supply chain challenges and labor shortages. As we head into 2023, companies should hope for the best but prepare for the worst, said NACM Economist Amy Crews Cutts, Ph.D., CBE.

“It looks like the first quarter of 2023 is when we will see a recession from the business side,” she said. “[Credit Managers’ Index] respondents have indicated for the last eight months that conditions are deteriorating so much that now the CMI is at its worst level outside of a recession.”

Wells Fargo forecasts a “modest recession” beginning mid-2023 and Fannie Mae predicts the economy will enter a recession in early 2023. The National Bureau of Economic Research is traditionally in charge of declaring an official recession, but many are uncertain of how a financial crisis will look in 2023 because of low unemployment.

So, what can businesses expect as we head into the new year? “Each recession is new and different in its own way and the causes are new and different in their own way,” Cutts said during a recent podcast episode of Extra Credit.

Inflation is easing and is expected to continue to decline over the next year. Prices rose 7.1% year over year in November, down from 7.7% the month prior and the 9.1% peak in June, according to data released by the U.S. Bureau of Labor Statistics earlier this week. But even with the decrease, inflation remains well above the Fed’s target range of 2%.

Interest rates will likely continue to increase in 2023, though at a slower pace, as the Federal Reserve continues to battle inflation. The Fed hiked rates for the seventh time this year on Wednesday, this time by 50 basis points. The targeted policy rate now sits between 4.25%-4.50% and is expected to rise to roughly 5.25% in 2023 as the Fed hinted to more increases in the new year.

“Even if the recession were to technically start now, inflation numbers won’t come down for some time because it is a lagging indicator,” Cutts explained. “The Fed, in its quest to quell inflation, is likely to continue raising interest rates. I don’t think they will continue as aggressively as they have been though. I expect we will see more 50- and 25-basis-point hikes. The Fed may slow interest rate increases and pause, but I don’t expect a rate cut, if it happens at all, until the end of next year.”

Unemployment is still low at 3.7%, but the Fed forecasts that number to rise to 4.6% in the coming year. Businesses struggled to find and retain quality staff in 2022, so Cutts is unsure if unemployment will increase as much as would typically be seen during a recession. She expects to see more hiring freezes instead.

Cutts said layoffs currently seem to be contained to the tech industry, which has announced major job cuts in recent months. “Job postings and hirings are slowing, but we’re not seeing big changes in the labor market that are indicative of massive layoffs. Though hiring is slowing a lot faster, quits and layoffs are not accelerating.”

Supply chain pressures are an ongoing issue for businesses. When supply pressures ease in one area, bottlenecks grow in another. Cutts expects these challenges to continue in 2023 as the supply chain shifts. “We are seeing more companies think about nearshoring,” she explained. “For a long time, it was all about cost efficiency—but that does not work anymore because businesses are still struggling to import and export goods. I think in 2023 we will see companies building for a more resilient and transparent supply chain, but that takes time and comes with higher costs.”

Supply chains will continue to undergo transformation. “The general dysfunction in global supply chains over the past few years has revealed the fragility of global transportation and distribution networks,” reads a report from Wells Fargo. “Even if not completely reshored post-pandemic, the desire for shorter and more resilient supply chains is likely to support industrial demand in the longer run.”

This article first appeared in the December 15 eNews. It is used with permission.

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