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The U.S. economy took a wild ride in 2022. Where is it headed next?

Inflation ran at or near 40-year highs in 2022. It’s now on the decline — but can the U.S. escape a recession in 2023?

SHARE The U.S. economy took a wild ride in 2022. Where is it headed next?
Wendy Buell prepares to hang an inflation buster product sign at Neighbors Market in North Salt Lake.

Wendy Buell prepares to hang an inflation buster product sign at Neighbors Market in North Salt Lake on Wednesday, Aug. 10, 2022.

Jeffrey D. Allred, Deseret News

In spite of the tumult of the past year, the U.S. economy is closing out 2022 in much the same condition it was in at the end of last year, with inflation running around 7%, an ultra-tight labor market and vibrant levels of consumer spending.

But where it’s been over the past 12 months, and where it’s headed in the year ahead, is the result of an unprecedented set of factors precipitated by the impacts of a global pandemic and policymakers’ collective struggles to navigate new problems with old tools and strategies.

Phil Dean, public finance senior research fellow at the University of Utah’s Kem C. Gardner Policy Institute, said inflation issues were foremost on the minds of economists and policy makers in 2022 as the impacts of higher prices hit lower income families the hardest.

“Obviously, record inflation and the policy responses to inflation have been the big economic story of 2022,” Dean said. “On the consumer side, it’s created challenges for everyone, but especially for those at the low end of the earnings spectrum who spend most of their income on necessities, where we saw some of the biggest inflationary increases.”

U.S. inflation in January of 2022 came in at 7.5% and climbed steadily until hitting a 40-year high of 9.1% in July. Since then, the rate has ticked down with the latest report from the U.S. Labor Department pegging November inflation at 7.1%. The U.S. Federal Reserve has pitched a yearlong battle against the elevated prices of goods and services, instituting the most aggressive series of rate hikes in decades in an attempt to cool off the red-hot economy.

Unleaded gas is advertised as $4.79 per gallon outside of a Chevron in Salt Lake City on Tuesday, May 10, 2022, as gas prices hit a new record high.

Unleaded gas is advertised as $4.79 per gallon as gas prices hit a new record high outside of a Chevron in Salt Lake City on Tuesday, May 10, 2022.

Kristin Murphy, Deseret News

The rate hikes aim to raise the cost of debt for businesses and consumers which should, theoretically, reduce the amount of spending and overall economic activity, a shift in dynamics that typically brings inflation rates down.

But consumer spending has remained robust and the U.S. labor market has continued to run red hot, with unfilled jobs far outnumbering the number of available workers to fill them.

Dean noted high inflation on its own is usually enough to put a damper on rampant spending, but an unprecedented level of cash flowed into the pockets of consumers in the form of pandemic stimulus funding and that, along with other factors, continued to buoy spending throughout 2022, even in the face of record-high prices.

“Inflation and rising interest rates have created some challenges in the current economy,” Dean said. “But alongside that, consumer spending continues to be very strong in Utah and across the U.S. During the pandemic, fiscal stimulus checks flowed to consumers and many took advantage of low interest rates that facilitated refinancing of mortgages that freed up even more money. And, if you look at consumers overall right now, they still have a lot of money to spend.”

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Homes in South Jordan are pictured on Monday, Oct. 10, 2022.

Scott G Winterton, Deseret News

The year the Fed went aggro

The nation’s premiere tool to control inflation lies in the hands of the Federal Reserve board of governors and its exclusive control of inter-bank lending rates. In 2022, the Fed made seven consecutive increases to its benchmark lending rate, including a 0.5% hike in December that brought its rate into the 4.25%-4.5% range. The December increase followed four 0.75% increases that represent the most aggressive series of boosts by the monetary body in decades.

But even the Fed’s top executive has acknowledged the weapons at its disposal to wage war on inflation are underpowered, at best.

Back in May, Fed Chairman Jerome Powell said the 0.5% rate hike levied that month by the board, along with a few subsequent 0.5% upward adjustments, had a “good chance” of cooling down inflation-driven consumer price increases.

“We need to do everything we can to restore stable prices as quickly and effectively as we can,” Powell said in a press conference held in May, per CNBC. “We think we have a good chance to do it without a significant increase in unemployment or a really sharp slowdown.”

But, Powell also acknowledged the Fed’s monetary toolkit is imprecise at best and the hoped-for outcome of stemming inflation is by no means guaranteed.

“We don’t have precision surgical tools. We have essentially interest rates, the balance sheet and forward guidance and they’re ... famously blunt tools,” Powell said at the press conference.

“No one thinks this will be easy. No one thinks it’s straightforward. But there’s certainly a plausible path to this,” he added.

Still, inflation continued to shoot up and the Fed was later compelled to go to the jumbo boosts of 0.75% for four meetings in a row.

At a press conference following the Fed board’s final meeting of the year in December, Powell signaled that more rate hikes were likely in 2023 even as Labor Department data continues to show U.S. inflation inching down.

“The worst pain would come from a failure to raise rates high enough and from us allowing inflation to become entrenched in the economy, so that the ultimate cost of getting it out of the economy would be very high in terms of employment, meaning very high unemployment for extended periods of time,” Powell said. “I wish there were a completely painless way to restore price stability. There isn’t. And this is the best we can do.”

Jill Reid writes a check for her groceries at Reams Food Store in Sandy.

Jill Reid writes a check for her groceries at Reams Food Store in Sandy on Friday, Sept. 23, 2022.

Jeffrey D. Allred, Deseret News

Here’s how Utahns felt about the economy in 2022

Deseret News/Hinckley Institute of Politics poll conducted in October found a whopping 93% of Utahns said they’re concerned about inflation, while only 6% said they’re not concerned.

More specifically, 64% said they’re “very concerned,” 29% said they’re “somewhat concerned,” 5% said they’re “not very concerned” and only 1% said they’re “not at all concerned.”

The number of Utahns citing inflation as a top worry had been on the rise since a July 2021 Deseret News poll that found 85% of Utahns were very or somewhat concerned about inflation. Another poll in February 2022 showed 93% of survey participants had concerns about the rising costs of goods and services.

October’s reading was only slightly down from a September poll, which found 96% of Utahns said they were very or somewhat concerned about inflation and 4% were not very or not at all concerned.

Another September Deseret News/Hinckley Institute of Politics poll got a more specific measure of how inflation was impacting Utah households.

When asked “how much more per month are you paying for basic goods,” 32% of survey participants said they were spending $201-$400 more per month now, 28% said they were spending $101-$200 more, and 22% said increased prices were impacting their budgets by more than $400 per month.

While 6% said they weren’t sure how much more they were spending, 12% estimated their extra costs for basics at $0-$100 per month.

Utahns saw more inflationary burdens than most of the country in 2022 as rates in the Mountain West, which includes the Beehive State, were at or near the highest in the nation throughout the year.

The latest reflection of that imbalance came in the Labor Department’s November inflation report, released on Dec. 13. While overall U.S. inflation was at 7.1% over the same time in 2021, the Mountain West region saw inflation running at an annual rate of 8.3% in November, the highest regional rate in the country.

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Produce for sale at Reams Food Store in Sandy on Friday, Sept. 23, 2022.

Jeffrey D. Allred, Deseret News

Is a 2023 recession a sure thing?

Rumors and prognostications about an economic recession have been swirling for months but the same dissonant factors that made the 2022 economy so difficult to predict, and control, will continue into 2023.

“Historically, when you have high inflation, and the Fed is jacking up interest rates to quell inflation, that results in a downturn or recession,” Mark Zandi, chief economist at Moody’s Analytics, told CNBC last week. “That invariably happens — the classic overheating scenario that leads to a recession. We’ve seen this story before. When inflation picks up and the Fed responds by pushing up interest rates, the economy ultimately caves under the weight of higher interest rates.”

Zandi is in the minority of economists who believe the Federal Reserve can avoid a recession by raising rates just long enough to avoid squashing growth. But he said expectations are high that the economy will swoon.

“Usually recessions sneak up on us. CEOs never talk about recessions,” Zandi said. “Now it seems CEOs are falling over themselves to say we’re falling into a recession. ... Every person on TV says recession. Every economist says recession. I’ve never seen anything like it.”