2023 – A Year of Moderation
Welcome to another edition of BlueSky’s perspective on the year in review and the year ahead. To say 2022 was a historic year is to deprive it of the magnitude of that history – it was very historic. Let’s take a quick look back at some of the milestones.
Let’s start with January 2nd when something almost unheard of happened – a South Korean citizen successfully snuck across the DMZ and defected to North Korea. Yes, you heard that right, and it should have told us that 2022 was about to march to the beat of its own drum.
In February, the world witnessed the Russian invasion of Ukraine. The concept of World War 3 suddenly became a plausible possibility, and we relearned a long-lost vocabulary with acronyms like MAD and concepts such as tactical nukes. Thankfully, the war did not escalate or expand, however, it did set in motion a sudden rise in global commodity prices. This global uptick conspired with rising inflation to put a damper on an already sluggish U.S. economy. The conflict also highlighted a host of other issues that included the EU’s reliance on natural gas from Russia, an expanding list of NATO members and a growing global supply chain issue. As winter wound into spring, U.S. consumer goods prices began to climb across the board. Estimates on forecasted real GDP growth for the U.S. were revised and lowered a half-percentage point, reflecting the continuing global financial malaise and its impact on our economy.
By June, everything was exploding, everywhere, all at once. The Bureau of Labor Statistics announced that during the 12 months between June of 2021 and June of 2022, the Consumer Price Index for all urban consumers increased by 9.1%. That’s the largest 12-month leap in consumer prices since 1981! If you put gas in your car in southern California in the summer of 2022, you were convinced it was the automotive end times when gas hit $8/gallon or more in some locations. Maybe that Toyota Prius didn’t look too bad after all? Consumers everywhere also faced rapidly rising interest rates. 30-year fixed mortgages opened the year at 3.22% and by mid-summer, had climbed to 5.41%. That rate would hit 6.90% by October of 2022.
That same month of June saw the world of politics and healthcare collide when Roe v. Wade was repealed. The January 6th Select Committee opened its live televised hearings in DC and Ketanji Brown became the first African American woman to sit on the US Supreme Court. Another round of culture wars flared up as Florida and several other conservative states passed legislation that directly impacted the LGBTQ+ community. Half-way through the year, and there were already hundreds of mass-shootings – by December that number would reach 600. COVID may have lost a step or two, but it continued to create a steady flow of new cases and loss of life, even if it wasn’t front-page news anymore.
As we passed into August, the BlueSky team noticed that things were starting to slow down. The tech industry, in particular, began to shed headcount in earnest with massive layoffs. According to TrueUp’s tech layoff tracker, there were 1,138 rounds of layoffs at tech companies globally from January through mid-November of 2022 affecting 182,605 people. Crunchbase puts the number of U.S. workers affected at 88,000. I really wish those numbers were typos.
August was also a historic month for U.S. weather patterns with not a single named storm – only the third time on record that has ever happened. The last time was 25 years ago. In September, nature proved it can swing the other way when Hurricane Ian slammed into Florida, killing 139 people, and creating an estimated $180 to $210 billion in damages. That same month marked the end of the reign of Britain’s longest-serving monarch, Queen Elizabeth II, who died at age 96. More than 250,000 people would stand in line for hours at a stretch to say goodbye to her at London’s Westminster Hall.
November marked a pivotal mid-term election that at first, seem poised to deliver a “red wave” that would flip control of congress. In the end, the blue team retained control, if only by the skin of their teeth, thanks in part to the outcome of the Georgia run-off.
Corrections & Balance Ahead
Alright, on to 2023. Those same mid-terms we just mentioned seem to indicate that there is perceived value in moderation relative to the extremism seen over the past few years. Look for this trend towards moderation to manifest itself in a variety of different ways in the year ahead.
For one, we expect 2023 to deliver a more moderated approach to business. The last couple of years haven’t been without their challenges, however, when money is basically free, business tends to be brisk. We see industry leaders moving away from the age of irrational business decisions and back to an approach that shows a greater desire for accurate financial and business analysis. Those advisory services will be highly sought after and offered at a premium in the year ahead. We also see investors moving towards a more moderate approach. During the last couple of years, we saw some wild times in the investment community with things like crypto, NFTs and the meteoric rise of floundering stocks (GameStop anyone?) that defied market logic. Highly speculative investments may have made sense when money was free, but in today’s market we see them evaporating quickly. The bottom line is that we see business and investing returning to a more rationale, less volatile approach as the cost of financing continues to rise in 2023.
Speaking of rising rates, experts are divided on the prognosis for the home mortgage market. We started 2022 at 3.22% and while most experts see 2023 rates hovering between 5 – 6%, some who are less optimistic say rates could go as high as 11%. Any significant hike in rates is going to cause a lot of pain for folks with existing ARMs, leave many recent home purchases underwater, and push large swathes of potential buyers out of the market. How the housing marketing will play out and perform in 2023 is ultimately anyone’s guess. Some form of a correction will happen, but to what extent remains hard to discern. Consumer spending will, however, continue despite inflation, but perhaps not at the level we saw in 2022. There is still the long-lingering consumer desire to get out and do something in this (mostly) post-COVID world. We see that consumer trend continuing in 2023 despite the slow, steady creep of inflation.
As we head into the new year, we’re now 3 months into a seismic shift in the job market that left employers in the driver’s seat. This would have felt inconceivable during the height of the Great Resignation a year or so ago. Where the war for talent was once won only by luring candidates to greener pastures with larger salaries and bigger benefits, hiring managers will be able to be more selective and frugal in the year to come. Look for employers to retain this control of the hiring equation throughout 2023.
How does the Future of Work evolve in the year ahead? The end of 2022 marked a steady decline in the availability of remote jobs even though demand for remote opportunities remained high. Many employers are now asking their teams to return to an office setting after years at home. The new normal will likely be a hybrid model with only about 20% of businesses requiring a full 5 days in the office. The rest will adopt a mix of remote and office work. We see companies being more flexible and thoughtful with employees during the hiring process, especially as budgets tighten and hiring managers look for ways to entice and retain candidates that go beyond financial compensation.
On the flip side, we see candidates taking a more pragmatic approach to job searches, especially in industries like tech that are awash in recently laid off talent. Hiring will continue in other industries, but at a much slower pace relative to a year ago. Job seekers are likely to place a premium on positions that offer job security, office flexibility and good work-life balance. Even the most amazing salary and benefits package are worthless if you get laid off, or worse, the company folds.
One of the biggest unknowns related to 2023 involves whether we are heading into a recession. We anticipate that global economic issues will continue to cause concern in the coming year, especially if Russia’s invasion of Ukraine continues unabated. Morgan Stanley predicts global GDP to be at 2.2% for 2023, only just avoiding the recession label. The most recent survey of the Professional Forecasters indicates that inflation will drop from its 2022 level of 5.9% to 2.9% in 2023. That’s good news for all of us, everywhere from the grocery store to the gas pump.
It also appears that COVID is not quite done with us yet. Look no further than China, where extreme measures like lockdowns and quarantines have returned. China’s approach aside, we anticipate that moderation will guide the U.S. and its continuing response to COVID in 2023. For example, here in Los Angeles we are seeing an alarming rise in the number of new COVID cases each day, and Los Angeles County health officials are reluctant to return to the more extreme measure of indoor mask mandates. Instead they are keeping indoor masking as a strong recommendation. This trend indicates that we are learning to live with COVID while keeping our economy, businesses and society moving with minimal disruption. Who says old dogs can’t learn new tricks?
From the entire team at BlueSky, we wish you the very best in 2023!Read More