Jill On Money: Economic lessons of 2023

After highlighting some of the investment lessons of 2023 last week, it’s time to turn to the broader economy and the lessons that have emerged. A year ago, there was an almost universal belief that 2023 would usher in a recession. Economists, analysts, and your cousin were all convinced that the Fed’s rate hikes, combined with inflation, would put an end to the economic expansion that started after the brief, but deep COVID 19 recession of 2020.

(Consider canceling your trip to The World Economic Forum in Davos, where last year, the group said “growth prospects remain anemic and the risk of a global recession is high.”) As it turns out, the U.S. economy turned in a solid performance in the first half of the year, growing by more than 2 percent annualized, then soared at an annualized pace of 5.2% in Q3.

U.S. GDP is likely to finish Q4 with more than a 2% annualized pace, which would make 2023 better than most years in the decade prior to the pandemic. Credit goes to consumers, who continue to propel growth with excess pandemic savings and with the security of a solid labor market. The economy has added an average of about 230,000 jobs per month through November.

Although job creation is tapering off and job openings are falling, the unemployment rate is near a historically low level of 3.7%. The annual inflation rate (as measured by the Consumer Price Index) peaked in June 2022 at 9.1%, a four decade high. As of November, the annual rate now stands at 3.1% and the core rate, which strips out volatile food and energy, is up 4% from a year ago.

Although inflation is moving in the right direction, you’re not crazy if you feel like everything costs more than before COVID. In fact, today it takes almost $120 to buy what $100 bought in November 2019! The Fed’s rate hike campaign, which was intended to quell inflation, began in March 2022, and likely ended in July 2023.

Short term interest rates soared from zero to the current range of 5.25 5.5%, which was either good or bad news, depending on your financial situation. Savers have been devouring high interest savings accounts and certificates of deposit, which are now routinely earning 5% or more. But for borrowers, high rates have inflicted a lot of pain.

If you carry a credit card balance, you are paying over 21%; auto loans for new and used cars are averaging about 8%; and while mortgage rates for 30 year fixed loans have retreated from 22 year highs of 7.8% in late October, they are now at just under 7%, which is more than double the rate seen just two years ago.

It’s not just those high mortgage interest rates that are causing would be homebuyers’ pain. The pandemic surge in housing demand, combined with low levels of inventory, has now distorted the housing market, driving prices up by more than 40% than prior to the pandemic. Given that housing affordability is tumbling, it’s time to ease up on your quest to buy a home and stay on the sidelines, at least for the foreseeable future.

The good news is that rents are finally easing (the median U.S. asking rent declined 2.1% year over year in November, according to Redfin) and as a bonus, just think of how much more time you will have when you stop surfing real estate sites!.