Entering 2023, inflation remains a dominant factor in the global economy. While we have recently seen the pace of inflation slow, inflation remains at very elevated levels. The Federal Reserve (Fed) has remained on course to tighten financial conditions in the hopes of alleviating the pressure of high prices. As of November, inflation, as measured by the Consumer Price Index (CPI), was +7.1% for the prior 12 months or +6.0% (excluding volatile categories like food and energy). Persistently high inflation has been a driver of the volatility we saw over the past year, and any relief could alleviate some of the volatility we have been experiencing. Lower inflation would allow the Fed to relax their aggressive tightening policies.
Tightening financial conditions through higher rates and balance sheet normalization pursued by the Fed could have consequences beyond reducing inflation. A slowdown in economic growth as measured by Gross Domestic Product (GDP) is likely to occur in 2023 as a result of the fight against inflation. While we did see +3.2% annualized GDP growth in Q3 of 2022 and remain on track for +4.1% (GDPNow estimate as of January 10, 2023) annualized GDP growth in Q4, growth in 2023 will likely slow as a result of tighter financial conditions. This outlook for slower growth is likely the main reason we have seen weaker stock market performance over the last several months, as the market usually anticipates and moves before the growth picture adjusts. The prospect of slowing growth usually leads to questions about how far growth can slow and whether it will slow enough to cause a recession. We believe that any slowdown, or even a recession, should it occur, would likely be mild to moderate and not anything like the Global Financial Crisis in the late 2000s.
One reason we do not anticipate a deep recession in 2023 is the strength and resilience of the labor market. The unemployment rate as of December is 3.5%, and while there are 5.7M unemployed people in the U.S., as of November (most recent data available), there are 10.4M job openings. We have also heard anecdotal evidence that employers are unwilling to cut jobs as freely as in the past, given the difficulty of finding workers in the post-pandemic period. As you have heard us say many times, consumption is 2/3 of economic growth in the United States. Given the strength of the job market, we think consumption should be sustained during any mild recession or economic slowdown, especially if prices are declining at the same time.
The macroeconomic backdrop is mixed at present. We anticipate inflation will continue to decline, which we see as a positive step. We also anticipate this better inflationary picture will allow the Federal Reserve to back off its restrictive policies throughout the year. The restrictive actions already taken by the Fed will cause growth to slow down or even decline this year. However, we are not anticipating a severe recession because of the strength of the consumer. As in 2022, this backdrop suggests a continued defensive portfolio allocation for 2023.