Notes on the Economy – Q1 2023 Summary

• 4 min read

turtle and snail racing
Judging by the economic data, no hare has yet entered the 2023 GDP race; the safest bet is likely on the tortoise.

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turtle and snail racing


The advance estimate for fourth quarter U.S. real GDP was an annualized 2.9%, but the apparent strength is less than meets the eye. Growth was elevated 1.5 percentage points by a sharp, and probably unintended, increase in inventory investment. It was further boosted 0.6 percentage points by a sizable increase in net exports, a typically volatile statistic. Real final sales grew a modest 1.4%, while total domestic demand (real final sales to domestic purchasers) was up a mere 0.2%.

In a similar vein, three January data releases made headlines reflecting favorably on economic growth. Retail sales advanced 3.0%, payroll employment jumped 517,000, and the Federal Reserve’s (Fed) industrial production index for manufacturing advanced 1.0%. The results were good, but heightened by one-off factors, including shifts in consumer spending patterns, favorable base effects, seasonal adjustment difficulties, and unusual weather. So, judging by the data, no hare has yet entered the 2023 GDP race. The safest bet is likely on the tortoise.

Late 2022 economic developments abroad show some similarities with the United States. Despite headwinds of monetary tightening, war, and the resurgence of COVID-19, economic growth proved more resilient than generally anticipated across many economies, including the Euro Area, and major emerging market (EM) countries. The sources of such upside surprises include easing supply bottlenecks, declining transportation costs, a mild winter on the European continent, and increased fiscal support in EMs.


  1. Inflation May Have Peaked, but It Is Not Falling Fast – Core consumer price inflation is likely to be in the range of 3.0% to 4.0% by the end of 2023, still well above the Fed’s 2.0% target.
  2. Interest Rates Have a Bit Further to Go – At its first policy meeting of 2023, the Fed increased the federal funds target a practical minimum of 25 basis points, but policymakers indicate that two or three more such increases are likely.
  3. Fixed-income Investors Should Be Lengthening Portfolio Duration – The current pace of Fed tightening and historical precedent suggest investors should target July for the completion of duration adjustments.
  4. The Bear Market Is Still a Threat – The bear market is likely to end in 2023, but conditions for the beginning of the next bull market have not yet been met.


Indications of subpar 2023 performance for the U.S. economy are not hard to find. Inventories appear overstocked, core new capital goods orders are flat, and housing starts are going downhill. More comprehensive data also suggests that economic growth is already weak. For example, the purchasing managers indexes (PMI) compiled by S&P Global puts US Manufacturing PMI at 46.9, US Services PMI at 46.8 and US Composite Output PMI at 46.8. Readings below 50.0 are indicative of a contraction in activity.

In any case, economic growth will be restrained by a tight monetary policy. Because inflation is set to decelerate at a modest pace, while the current demand for labor is unusually robust, the Fed is not likely to reverse its tight-money policy any time soon. More likely, Fed policymakers will follow through on their announced intentions. If that is so, the federal funds rate will soon top 5.0% and remain there for an extended period, ensuring a tight monetary policy extending into 2024.

Many of the world’s economies face the problem of high inflation together with lingering supply-chain issues and tight labor market conditions. It is not surprising that since mid-2022 central banks around the world have tightened monetary policies, downshifting the outlook for global real GDP growth. On balance, however, the downshift will place economic output well short of a major decline. In January, for example, the International Monetary Fund (IMF) published 2023 economic output growth forecasts 2.9% for the global economy, 1.2% for developed economies, and 4.0% for EM and developing economies. By way of comparison, estimated 2022 growth for those regions was 3.4%, 2.7%, and 3.9%, respectively.

* The information contained within this edition of the Notes on the Economy Executive Summary is based on data released as of Feb. 20, 2023.

To receive a full copy of the Executive Summary or the entire 24-page “Notes on the Economy” report, contact your AMG advisor or submit a request for more information.


This information is for general information use only. It is not tailored to any specific situation, is not intended to be investment, tax, financial, legal, or other advice and should not be relied on as such. AMG’s opinions are subject to change without notice, and this report may not be updated to reflect changes in opinion. Forecasts, estimates, and certain other information contained herein are based on proprietary research and should not be considered investment advice or a recommendation to buy, sell or hold any particular security, strategy, or investment product.

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