Year in Review & 2023 Outlook: GDP, Inflation, Employment, and Policy

By at 3 January, 2023, 10:35 am


by Raymond J. Keating –

To say that the last few years have been rough from an economic standpoint would be an understatement. So, let’s hope that matters improve in 2023 and beyond. Unfortunately, policymakers are making it hard to keep hope alive.

Let’s take a quick look at where we’ve been according to three major measures – GDP, inflation and employment.

GDP. Of course, with the onset of the pandemic and related shutdowns, the economy tanked in a historic way in the first half of 2020, and we’ve been working to get back to normal ever since, dealing with supply chain, labor and other challenges along the way.

After showing some resiliency in fighting back in 2021, the economy hit the skids again in 2022, with real GDP shrinking by 1.6 percent in the first quarter and by 0.6 percent in the second quarter. Growth resumed (+3.2 percent) in the third quarter, and we await the first read on the fourth quarter at the end of January. But the bottom line is that 2022 was a tough year when, quite frankly, the U.S. economy should have been continuing a period of robust growth.

Inflation. Much of the economic story post-pandemic has focused on inflation and its possible causes. Inflation started running hot in early 2021, and we’ve experienced levels of inflation not seen since the 1970s and very early 1980s. But the latest inflation (Consumer Price Index) report offered hope. As SBE Council explained:

“CPI inflation registered 0.1 percent for November. That was a marked slowdown not just from the two previous months – which both registered 0.4 percent – but from the red hot inflation that raged prior to July… Over the past year, inflation registered 7.1 percent. But if we look at the last five months, we’ve seen a notable slowdown in inflation. In fact, if we annualize the data from the last five months, we get an annual inflation rate of 2.4 percent. If we were to settle into that range for a while, and then perhaps falling back to the 2 percent or less range, that would be a mighty and positive transformation.”

This assessment came with a warning: “But as we’ve said before, periods of high inflation include a good deal of volatility, whereby a month or two of positives give way to inflations spikes.”

Employment. The labor market has been tight post-pandemic, and that overwhelmingly has been about people not entering or re-entering the labor market. Just consider the following chart offering a look at the labor force participation rate among those in the key working age bracket of 25-54 years of age.

Source: Federal Reserve Bank of St. Louis, FRED

The labor force participation rate in November (82.4 percent) has been declining in the three most recent months; is still down from its pre-pandemic level (83.0 percent in February 2020); and is off markedly from where it registered in the late 1990s (for example, 84.6 percent in January 1999).

For good measure, U.S. working age population growth has slowed to a crawl over the past 15 years (see the following chart.)

Source: Federal Reserve Bank of St. Louis, FRED

So, the working age population (25-54 years old) basically has stagnated, and labor force participation rate among this group has declined. This is a pressing issue now and in coming years.

Looking Ahead at 2023 and Beyond. Given these issues, as we look ahead to 2023 and beyond, the U.S. economy needs a pro-growth agenda from policymakers at the federal, state and local levels. While some positives have been happening in various states (though with other states doing much wrong), federal policymaking has been working in an anti-growth agenda, and looking at 2023 and 2024, the best that it appears that we can hope for would be an agenda that doesn’t make matters any worse. But that’s not enough. Consider where matters need to go in key areas.

Taxes. As opposed to the agenda of higher taxes embraced by President Biden, we need changes in tax policy that provide substantive relief and incentivize growth-generating entrepreneurship, investment, innovation and work. Cutting the capital gains and indexing gains for inflation would be big plusses, as would reducing personal income tax rates, including the highest rates.

Regulation. The Biden administration also has been on a crusade to regulate far and wide. But mounting regulatory burdens have taken a severe toll on growth for decades, and Biden is only vastly expanding the negatives. Indeed, efforts at regulatory reform are long overdue. Policymakers need to undertake a systematic and through review of regulations, and eliminate costly and unnecessary burdens.

Trade. Unfortunately, like the Trump administration before it, the Biden administration has been pushing a protectionist trade agenda. That’s been bad news for U.S. consumers, businesses and workers. It must be kept in mind that nearly every import into the U.S. is an input to an American business. It’s time to put aside the political opportunism and economic ignorance of protectionism, and have the U.S. return as the global leader for advancing free trade. By reducing governmental barriers for trade, benefits will accrue to U.S. consumers, entrepreneurs, businesses and workers. In addition to advancing free trade agreements, part of a free trade agenda will require Congress to fix past mistakes that gave away far too much power to the White House in terms of imposing tariffs and quotas.

Immigration. The only real, long-term solution to the population and labor force issues noted above is for the U.S. to finally fix its immigration system. Unfortunately, each party has political reasons not to do so. Elected officials need to put sordid politics aside, and embrace sound economics on immigration. That means reforms that welcome more immigrants who are willing to work and build new businesses (the rate of entrepreneurship is far higher among immigrants compared to the native born), while strengthening protections against letting those into the nation who would do harm.

Government Spending. Government spending expanded rapidly during the Trump years, exploded with the pandemic, and are projected by the Biden administration to run at unprecedented levels in coming years. But since government spending decisions are guided by political incentives, and more spending means draining increasing resources from the private sector via taxes and borrowing, high government spending levels only serve as another drag on the economy. Reining in spending levels as a share of the economy to where they were during the Clinton years – at 18 percent of GDP rather than the 24.5 percent projected by the Biden administration – would be a big economic positive.

The Fed’s Monetary Policy. As noted earlier, hopefully we’re starting to turn the corner on inflation. If so, that’s no thanks to the Federal Reserve. After running unprecedented loose money for some 14 years, the Fed then decided to fight inflation by jacking up interest rates in an effort to slow economic growth in an already troubled economy. (See more on Fed foolishness here.) A Fed focused exclusively on maintaining price stability via sound decisions relating to the money supply, and leaving interest rates to the market, would be far preferable to a Fed that seems to think it can and should guide the economy via interest rate manipulation.

As we look at 2023, the possibility for a triple-dip recession is quite real, and its largely about a Fed bent on bringing about a recession, and a White House and Congress pushing an agenda that also seems designed to bring about an economic downturn.

The well-being of the U.S. economy will continue to be about entrepreneurs, investors, businesses and workers fighting off counter-productive policy measures. Imagine what might be accomplished if policymakers were focused on actually helping the economy.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest book is The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist.


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