Economic Update: January 23, 2023


Following two consecutive quarters of negative GDP growth, 3Q22 real GDP showed the economy grew by a 2.9% annualized rate. Much of the gain came from a large upswing in trade, while beneath the surface the economy is still losing momentum in both growth and inflation. Real consumer spending continued to soften and construction spending was very weak with higher interest rates. However, investment spending is still holding up and the GDP price deflator declined markedly to 4.1% from 9% last quarter. Moreover, with pent-up demand for autos and a still very tight labor market, it’s clear the economy is not yet in recession.


The December Jobs report was strong with an above-consensus gain for payroll jobs and a decline in the unemployment rate to 3.5%. Notably, wage growth continued to moderate and was revised lower in the prior two months. With sliding wage growth and headline inflation, it is hard to justify the need for overly aggressive action from the Fed to tame inflation, and this report widens the window for a soft landing. The job market remains the strongest aspect of the economy right now.


The 4Q22 earnings season is underway, with 52 companies having reported (12.4% of market cap). Our current estimate for 4Q22 earnings per share is $52.61, representing a y/y decline of 7.3% but q/q growth of 4.5%. So far, 52% of companies have beaten earnings expectations while 48% have beaten revenue expectations. Management commentary across sectors highlighted that higher input costs and a stronger dollar continue to negatively impact results. Notably, margin contraction has been the largest detractor in earnings while revenue has grown modestly.


The December CPI report confirmed that the inflation surge of 2022 is fading as Headline CPI fell 0.1% m/m and 6.4% y/y while Core CPI rose by 0.3% m/m. Lower energy prices and moderating food prices continued to help lower headline inflation, while CPI ex-food, energy and shelter fell for the third consecutive month due to falling vehicle prices, lower health insurance rates and lower airline fares. Shelter inflation increased 0.8% m/m, partially offsetting the general decline in inflation. Overall, inflation should continue to fall throughout 2023 and reduce the risk of aggressive tightening from the Fed.


Despite a recent inflation moderation, the Fed has maintained its hawkish messaging on monetary policy. At its December meeting, the FOMC hiked rates at a reduced pace of 0.50% to a range of 4.25%-4.50%. Markets were most surprised by the Fed’s updated Summary of Economic Projections, which showed a picture of higher unemployment, higher inflation and slower growth in 2023 and 2024. The median FOMC member now expects a terminal rate at or above 5% next year. Further cooling in inflation data may allow the Fed to pivot before hiking rates above 5%, but the risk of Fed overtightening and inducing a recession remains elevated.


  • An overly aggressive Fed could push the economy into recession.
  • Markets may remain depressed and volatile until investors receive clarity on the pathway for inflation and the Fed.
  • A disruptive move away from the zero-COVID policy in China could snarl supply chains once again.

Investment Themes

  • After 2022’s sell-off, fixed income now offers higher yield and more protection against a market correction or economic downturn.
  • Solid profit growth and reasonable valuations will be crucial in determining equity winners in a higher rate environment.
  • Long-term growth prospects, a falling dollar and wide valuation discounts support international equities.

Originally Posted January 23, 2023 – Economic Update

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