Consumers and investors are wondering how much the cost of living will rise as inflation remains at a 40-year high.
But the question that frightens everyone -- consumers, markets and government -- is whether the economy will enter a recession.
The "R" word is the scary word. But for many economists there is no longer any doubt: recession is on the menu for 2023.
A December survey of 38 economists by Bloomberg showed they saw a 70% chance for a recession next year. That’s up from 65% in November. The economists say the Federal Reserve’s interest rate hikes will cut demand.
They forecast that consumer spending, which makes up two-thirds of GDP, will barely increase in the middle six months of the year.
Median estimates call for GDP growth of only 0.3% in 2023 as a whole. That includes an annualized 0.7% dip in the second quarter and zero growth in the first and third quarters.
"We expect that the Fed will stay in restrictive policy for a while unless the effect on real GDP growth and unemployment becomes particularly severe and inflation has fallen close to target,” said Maria Vassalou, co-chief investment officer of multiasset solutions at Goldman Sachs Asset Management.
'The US in Recession By Any Definition'
Many business leaders including Elon Musk and Jeff Bezos have also already warned of a recession.
"My advice to people, small business owners is take some risks off the table. If you are going to make a purchase maybe slow down that purchase a little bit," Bezos said last November. "If you are an individual and you are thinking about buying a new large screen TV maybe slow that down keep that cash, see what happens. Same thing with a refrigerator, a new car whatever, let’s take some risks off the table."
"If you are a small business maybe delay some capital purchases: do you need that new piece of equipment? Maybe it can wait a little bit, have some cash on hands; just a little bit of risk reduction could make the difference for that small business."
Michael Burry, the legendary investor who has become the oracle of Wall Street, seems to share this pessimistic diagnosis. He has just given his first predictions for 2023, and these are grim.
Burry claims that regardless of how the word recession is defined, the U.S. economy will be in recession in 2023.
"Inflation peaked," Burry wrote on Twitter on Jan. 1. "But it is not the last peak of this cycle. We are likely to see CPI lower, possibly negative in 2H 2023, and the US in recession by any definition."
He then describes a vicious circle. The Federal Reserve, which has raised interest rates to a level not seen since the 2008 financial crisis, will pivot and cut rates, while the federal government should announce a stimulus package to help households strangled by the deteriorating economy.
All of this will end with another resurgence of inflation, which is similar to what happened during the covid-19 pandemic. Basically, we are going to see a rehearsal of what happened after March 2020.
"Fed will cut and government will stimulate. And we will have another inflation spike. It's not hard," Burry says.
Burry's Past Predictions Are Legendary
The 2008 financial crisis, one of the biggest financial debacles in history, made Burry a legend. It made him one of the examples to follow in the defiance of standard practices in financial circles.
The 2015 film "The Big Short" describes how the investor, who had no particular expertise in finance and real estate, came to understand that the sector had become a sandcastle, with financiers and bankers creating exotic products based on mortgages given to financially fragile households and borrowers with poor credit.
He, therefore, decided to bet on the collapse of the subprime mortgage market, hence the name "Big Short." History proved him right. Since then, Burry, who now runs hedge fund Scion Asset Management, has become something of a Wall Street oracle.
He embraced this role judging by his Twitter handle which is Cassandra B.C. For traders and risk takers, he is a kind of party spoiler.
In recent months, Burry warned that the economic situation was going to deteriorate seriously, that massive layoffs of white collar workers were on the horizon; he predicted that the stock market was going to have a moment of truth, after two years of prosperity during the pandemic.
All of these warnings came true in 2022.
