Clouds gathering, turbulence growing for 2023

The Russia-Ukraine war has worsened the situation, Palisin adds. 

“The war has created an energy crunch and a disruption in raw materials from that region that have trickled through the economy to exacerbate the supply chain issues,” he says. 

Companies are responding by moving to reduce their reliance on China, Palisin adds. 

“They’re sourcing from additional countries to reduce disruptions,” he says.

Housing headwinds

Housing, a key driver of the economy, has also entered a period of correction. 

“The underlying dynamics of the housing market are changing as lower affordability spurred by higher prices and mortgage rates is starting to significantly weigh on demand,” Yaros says. 

Limited affordability is discouraging consumers from signing on the bottom line. Median prices for existing single-family homes are expected to increase 11.5 percent when 2022 figures are finally tallied. That comes off a strong 18 percent increase in 2021. Any relief will only come in 2023, when prices should decline by 2.6 percent. 

While affordability has sunk to its lowest level since late 2007, the 30-year fixed mortgage rate is within striking distance of its highest level in over a decade, leading to a decline in purchase applications. 

Tight housing supply is only adding to upward pricing pressure. The inventory of for-sale homes remains historically low, and new ones will be scarce on the ground. 

“We expect housing starts to fall by 1.8 percent and 2 percent in 2022 and 2023, respectively,” Yaros says. “This compares with a 15.1 percent increase in 2021.”

There’s only so much the industry can do to bolster housing supply. One big reason is the labor shortage. 

“The unemployment rate for experienced construction workers is about as low as it’s ever been,” Yaros says. “Capacity limits have delayed housing completions and contributed to a record number of housing units in the pipeline.”

One bright spot in the housing picture: mortgage credit quality has never been better. 

“The percent of loans delinquent and in foreclosure is at a record low,” Yaros says. “This goes to the stellar underwriting standards since the financial crisis, and borrowers’ credit scores are much higher.” 

While lending standards for mortgage loans are now tightening, the credit spigot is unlikely to seize up as it did during the financial crisis of 2008.

Looking ahead

Given the many concerns, it’s little wonder corporate confidence is taking a hit. As the calendar turns to a new year, companies are responding to soaring interest rates and inflation by scaling back the capital investments that help fuel the economy. 

“Up until the second half of 2022, most companies were taking advantage of low rates to plan ahead for equipment purchases and expansion opportunities,” Palisin says. “Now, though, many are taking second looks at anything planned for 2023.”

Businesses are also taking steps to increase their liquidity to cushion against tough times. 

“We are all going to need to watch our cash flow,” Palisin says. “Most of our members anticipate a slowdown in orders, and as a result they are holding off on some future investments and pulling back in hiring.”

Uncertainty is the name of the game, and that makes planning difficult. 

“We are faced with a kind of two-sided coin,” Palisin says. “The positive side represents strong current orders and a continuing need for more workers, while the negative side represents inflationary pressures and global headwinds.”

Which side of the coin will show its face in 2023? Economists advise watching a few key indicators. 

“In the early part of the year companies should keep an eye on what is happening with the cost of money,” Basu says. “Inflation is the driver of near- and-medium term economic outlooks.” 

A second vital element, he says, is the employment picture. 

“Employers should watch for any emerging weakness in the labor market,” Basu says.

Phillip M. Perry is an award-winning journalist who is published widely in the fields of business management, workplace psychology and employment law.

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