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The first two quarters of 2022 began with negative growth in the gross domestic product. It seemed as if we were headed into a recession. The Fed had to tame inflation that was getting out of control, so it raised the target Fed funds rate from 0.25% in March to 4.5% now. In the face of these higher interest rates, rising debt levels worldwide stemming from policies to weather the pandemic put severe constraints on fiscal policy. In the U.S., federal debt held by the public was $24 trillion in the third quarter of 2022, which amounted to 95% of GDP, up from 80% before the pandemic. China’s zero-Covid policy continued to put a drag on global supply chains. Russia’s war on Ukraine created global anxiety and rising oil and food prices.
You could be forgiven for thinking that 2022 was an awful year for the economy. But it could have been an absolute disaster. What saved the day was the job market. As a result, the economic pain has been more tolerable to more people — because they continue to have paychecks — and the overall economic picture at the end of the year is far less dire than many expected.
In December 2021, the unemployment rate was at 3.9%, reflecting an amazing recovery from 14.7% at the height of the pandemic — but it continued to fall to 3.7% by October. Overall, more people were being employed during 2022. At the start of the pandemic, 80.5% of the population ages 25 to 54 were employed. That dipped to 69.6% at the end of lockdowns, but it had recovered to 79% at the end of 2021 and continued to rise to 79.7% in November.
More amazing still, the economy in 2022 was especially favorable to low-wage workers. From the third quarter of 2021 to the third quarter of 2022, the lowest-wage workers on average experienced a 9% rise in wages, whereas the highest-wage worker experienced only a 5% rise (not even enough to keep up with the 8% inflation). This trend reversed decades of rising income inequality.
Low-wage workers benefited the most from the recovery because firms had to compete with government assistance programs to entice workers to re-enter the labor market. It is also possible that some of the new technology, such as digital tools to facilitate service-oriented interactions, like using apps to pay for meals, boosted the productivity of low-skilled workers. This would be an important reversal of the trend of IT innovation being directed at improving the productivity of high-skilled workers, such as with computers.
The superstar tech companies, such as Google, Facebook, Amazon, Apple and Microsoft, were also not behind the strength of the job market in 2022. From November 2021 to November of this year, employment in firms larger than 500 employees rose by only 469,000 workers. Instead, it was the middle of the pack that led the way. Employment in firms with 20 employees or more but less than 500 employees rose by 3,445,000 workers (though unfortunately very small firms struggled, with companies with less than 20 employees losing 223,000 workers from last November to this one).
The housing market also didn’t suffer the blows it might have. While the strong start the housing market enjoyed out of the gate in 2022 has come to an end, work from home seems here to stay. The consequence will be a permanent rise in the demand for housing that will keep housing prices strong for some time. Without this new demand, the rise in interest rates could have led to a housing crash in 2022 instead of a mere slowdown.
All of which means 2023 might turn out better in economic terms, as well. Housing doesn’t seem likely to spur a recession, as it did in 2008. And the strength of the job market is key to recovery, as more people have incomes to use to spend on goods and services and there is less need to provide government assistance to those left behind. Adapting to the pandemic accelerated a wave of innovation in automation, IT and cloud computing that will filter down to almost every business in the economy. This should spark a boom in productivity, especially in the service sector, which accounts for 86% of all non-farm workers. Long-term, this is the only way incomes will rise, although in the short term it may mean workers will need to change jobs and acquire new skills.
With intelligent management of the economy (yeah, a big if), we should continue to see the fruits of these changes throughout 2023.
