Easing Inflation and Slowing Growth Seen as 2023 Closes

Article from MHI Solutions Magazine

The economic outlook for the end of 2023 is mixed. Global growth data has weakened, while data in the United States has remained resilient. Global GDP growth and manufacturing have slowed. But the U.S. labor market has been relatively resilient even though U.S. manufacturing has slowed.

The U.S. economy continues to find support in consumption—especially services consumption, which is likely an extension of “revenge consumption” in the aftermath of COVID. Will this outlook continue, wherein U.S. growth, jobs and financial markets remain on more solid footing than foreign economies, or will recession come home to roost in the wake of so many interest rate increases?

Manufacturing weakness

Manufacturing is normally a leading indicator of economic growth. Even though manufacturing is a small percentage of the economy and the labor market in most economies (especially in the U.S. and Eurozone), it is a capital-intensive industry and, as such, tends to lead other sectors. There have been significant negative data through the first half of 2023, including contractions in the aggregate global manufacturing series I use, which is comprised of U.S., Chinese and Eurozone data. Aside from this slowing manufacturing data, which has been accompanied by contractions in U.S. manufacturing activity, global GDP growth data have been weaker than in 2022—and foreign growth data are much weaker than U.S. GDP reports.

The war on inflation

Inflation presents a threat to economic stability and long-term growth potential. After all, most governments run deficits and have large debt-to-GDP ratios. So, if inflation remained high, long-term interest rates would rise. This would necessitate economies, including the United States, to allocate more of the government budget to servicing the national debt. This would reduce the available government funds for defense and non-defense spending, reducing the government contribution to GDP. Furthermore, it might even require an increase in taxes to cover the cost of higher interest payments on such a large amount of debt. This is why killing inflation is such an important bipartisan or nonpartisan issue. Because if inflation persists, we all lose—individuals and businesses throughout the economy, regardless of party affiliation…

Read the full article in MHI Solutions Magazine