“A year of surprise.”
That’s how Patti Brennan, president and CEO of Key Financial Inc. characterized 2022 during Friday’s Economic Outlook hosted by the Chester County Economic Development Council.
This was the 19th year for the event, which offers expert insights on the local, national and global economies.
Brennan, who has been named a Hall of Fame Advisor by Dow Jones & Company’s Barron’s, was joined this year by economic specialist Dianne P. Manges, director/senior investment advisor for Truist Foundations & Endowments Specialty Practice.
The pair offered their take on the impacts of an “unprecedented post-COVID economy,” the challenges faced, and what they see as trends for 2023.
A surprising year
In detailing the surprising nature of 2022, Brennan noted Russia’s invasion of Ukraine early last year and supply chain issues that continued longer than anticipated, according to a post-event press release.
“As a result, inflation spiraled up quickly and the Federal Reserve had to be as aggressive in fighting inflation as it was in fighting the impact of COVID during the global shutdown,” she said.
Brennan noted that 40% of inflation measurements are related to housing. She added that there is a 12- to 18-month lag in the data being included in the Consumer Price Index (CPI), which is a measure of the average change over time in prices paid by consumers for goods.
Because of that lag, she said, the country is dealing with the underlying inflation of 2020 and 2021 instead of what the data reflected then. Supply chain issues are not back to pre-pandemic levels, but they are getting better, she said, and noted the aggressive Fed policy is having an impact as well.
Brennan anticipates inflation will continue to come down in 2023.
The final surprise of the year, she said, was how the bond market responded to rising rates.
“Since the Great Depression, we’ve only had three years where the bond market has been negative. Until last year, there has never been a year where the bond market was down double digits, yet we saw a loss of 13% in a bond index,” she explained.
“Surprises move the economy and the markets negatively. It’s okay to be surprised, but we can be prepared for the surprises. Surprises can be positive ones, too, and it’s important not to miss out on those.”
The ‘R’ word
According to information in the release, Brennan said one thing that would not be a surprise in 2023 — a recession.
“It’s the most expected recession ever. Businesses and consumers have been preparing for it, so the damage may not be as severe,” she said. “The numbers are showing that the American consumer has never been in better shape heading into a recession, and corporations also have very strong savings on their balance sheets.”
Manges added that while the risk of recession is there, it’s not necessarily a given.
“Clearly, we have the tightest global monetary policy in 40 years, from the Fed to minor and major central banks tightening to fight inflation after a massive stimulus. But consumer spending is expected to be quite strong in 2023 and the labor market is tight,” she said. “The American consumer has the potential to keep us above water.”
Manges said concerns about Ukraine and China continue to be “top of mind” for many investors worried about recessionary pressures and sluggish growth. She pointed out, however, that the U.S. and Europe — which together comprise half of the global economy — will be the driving force for gauging health of the economy and policies in 2023.
In addition, she is “cautiously optimistic” about China’s President Xi Jinping beginning a third term and delivering GDP growth over 5%. “He’s aggressive and competitive,” Manges said.
U.S. conditions
Domestically, Brennan said she expects higher borrowing costs to continue and unemployment to pick up and advises people to keep their emergency funds fully-funded.
She added that there is opportunity for retirees and older workers.
“Retirees have had to tolerate more of their money in stocks, because bonds were paying minimal interest. Now we have more options,” she said, adding that empty nesters that are behind on their retirement planning can now put $22,500 into their 401(k) plus another $7,500 each year.
“A couple of empty nesters who might feel a bit behind can put $60,000 into a 401(k) to catch up, and they should,” Brennan added.
The always popular Economic Outlook event was held at Penn State Great Valley in East Whiteland Township, with more than 150 business executives and personal investors attending.