What to watch for in the economy in 2023

WASHINGTON — After a brutal year of rising prices and economic uncertainty, the country is ending 2022 with some signs of hope that inflation is cooling as the job market remains strong. But economists and CEOs warn the economy will remain on shaky ground in 2023, which could mean another turbulent year for consumers. 

The year ended with a mixed picture for the economy. The Federal Reserve’s preferred inflation measure indicated price increases slowed in November, although they were still higher than usual. Consumers spent more this holiday season, but with prices up, they got less bang for their holiday bucks. Despite high-profile layoffs at tech and media companies, unemployment remained relatively low in November, at 3.7%. 

Still, economists predict a 70% chance of a recession in 2023, more than double the odds they gave six months ago, according to a survey by Bloomberg. But just how painful that slowdown would be depends on a variety of factors at home and abroad, including how the latest Covid outbreak in China plays out, what steps the Federal Reserve takes on its path to cool inflation and how much employers scale back their workforces. 

Here are four things to watch for in the economy in 2023:

Covid’s toll on China 

While Covid infections in China may seem like a remote concern for most Americans, their ripple effects throughout the economy are expected to have big implications given China’s vital role as a trading partner to the U.S. and a major global consumer of oil and gas. 

After months of strict lockdowns that caused rolling disruptions to supply chains and greatly stifled demand from Chinese consumers, China began lifting its Covid restrictions in recent weeks. Now, the highly contagious omicron variant of the coronavirus is rapidly starting to spread. China has stopped releasing official case counts; one Shanghai hospital said last week it expected half of the city’s 25 million people to get infected in the coming days, Reuters reported.

China’s latest outbreak is resulting in another wave of supply chain disruptions as factories shut down with workers out sick, and it’s unclear how long it will take for infections to ebb and businesses to return to some semblance of normal. 

“China will eventually learn to live with Covid, but it’s going to be a really rocky path to get there, as we all experienced here, just much earlier,” said Megan Greene, the global chief economist at the Kroll Institute, an economic research firm.

Once China does make it through the worst of the pandemic, there is expected to be a surge in oil used by Chinese consumers who have largely been stuck at home and unable to travel for months. The return of China’s demand for oil could drive global prices higher, affecting Americans filling up their gas tanks. 

“The most important thing for 2023 is by far China’s Covid policy,” Dan Klein, the head of energy pathways at S&P Global Commodity Insights. “China had virtually no growth in energy demand in 2022, which is pretty stunning, to say the least.”

The Fed’s next move

The Federal Reserve has been trying to put the brakes on decades-high inflation by raising interest rates…