An Economic Forecast for 2023: DU Professor Shares Cautious Optimism

The economic weather seems to rock our personal and collective worlds but what’s really going on and how might recent winds of change affect the University of Denver community? The College of Arts, Humanities & Social Sciences (CAHSS) newsroom asked Markus Schneider, associate professor and chair of the Department of Economics, for his take on what’s happened over the last few years and the economic outlook for 2023.

We’re hearing so much about economic upheaval in the form of inflation, rising interest rates and layoffs by large companies, especially within the tech sector. What specific challenges might the economy present for students, faculty and staff members in 2023?

There’s definitely a certain amount of wait-and-see. One factor that’s driving inflation and very important to the more local context is that we’ve seen housing prices increase dramatically in Colorado particularly in places where we hadn’t seen housing prices come up that fast. The pandemic happened, people were working remotely and moving to mountain towns and suddenly the housing crisis, which was on the horizon before the pandemic, grew much worse.

Denver housing prices did stabilize a little in the last year but are still very high and present a huge impediment for new students, new faculty, new staff coming to Denver. We have a structural shortage of housing that’s creating that price pressure. Gov. [Jared] Polis recently announced making housing a top priority, creating more housing stock, trying to do it faster and remove some restrictions. I’m cautious about that approach but we do need more housing and so much of the local economy depends on how well those kinds of efforts pay off. And we’re talking about Denver but the housing crisis is relevant for our students in a lot of areas that they’re likely to move to.

In general, I think times look much better for our graduates and students in 2023 than say when I started at DU in 2009 and we were in a deep recession.

Let’s talk about the general economic climate we’ve been experiencing nationally and globally. What factors have led to these challenges?

In certain ways we put blinders on as to how much of what we’re living through is still just fallout from the pandemic. We went into lockdown and saw very slow price increases in 2020 that lasted well into 2021. So, because we measure inflation from one year to the next, the year-over-year change emphasizes how much prices have gone up as compared to a time when they were historically very low.

Stories that government spending, or what economists refer to as a ‘wage-price spiral’ where price increases driven by higher wages are responsible for inflation, don’t really capture what’s going on now. What we’re really seeing is this passing through of adjustments due to a quite volatile global time. Also, a lot of the high inflation numbers that make the headlines don’t reflect overall prices going up in unison but in very specific sectors. Early inflation was driven by factors such as used car prices and as restrictions were lifted, we saw travel costs and airline tickets go up. Oil and gas prices driven by global issues like the war in Ukraine played a lot into last year’s inflation story. During the pandemic demand for oil went way down and entities like OPEC restricted supply and were slow to increase as economic activity came back.

There are those who believe that the government’s response to the pandemic triggered inflation. Could you address criticisms about government intervention?

This has become politically fraught territory but to me, while government policy was not perfect, it’s hard to see how we would have handled it otherwise. Criticism that the shutdown created these issues is just fantasy. Even with the imperfect policies and stops and starts to lockdowns, more than a million people in the United States ended up dying of COVID. It’s not like normal economic activity would have gone on if we had not locked down, it would have meant much bigger losses to the workforce.

At the same time, when you tell people not to work you cannot let them just starve or be kicked out of their houses so I don’t see much choice around government subsidies and other measures taken. We can quibble about exact amounts but in broad qualitative terms it was absolutely the right decision.

What is your take on the instability in the stock market we’ve been experiencing?

The stock market has been quite volatile and seen some downturns although it’s recently a little more up. But I always emphasize that the stock market is not the economy. The stock market is predicated on the prospects of future profits and also derives some energy from investors coming into it when they’re not seeing good options elsewhere. So, one of the reasons the stock market has faltered is that with higher interest rates, government bonds and other options look better. They’re both safer and offering decent return. That often affects the tech sector in particular because they’re not seeing the same kind of investment flow.

Future profits go down when labor costs are expected to be higher in the future so the wage gains by workers also are related to why the stock market isn’t feeling so confident. But because most of us collect a monthly or bi-weekly paycheck that’s quite a good sign. There’s a good Forbes article on why employment remains strong despite inflation coming down.

Is there any consensus from leading economists on the economic outlook for 2023?

I’m always a little skeptical when economists reach consensus, historically that’s often a bad sign. But in 2022 when inflation started to rise there was mostly consensus that this will be passing and temporary and we don’t really need to worry about it. But then it lasted longer than anybody expected and eventually the Fed did act by raising interest rates.

As I said, a lot of the inflation has been driven by fallout from the pandemic and global political conditions. Raising interest rates is an effort to slow down the economy so that unemployment will creep up and slow down wage increases but that’s not really the problem that’s driving inflation. We don’t have other good tools available to us and so the Fed and most central banks are trying to pull off this balancing act of crafting a ‘soft landing’ that slows down the economy just enough to take pressure off prices without causing a full recession.

Nobody is excluding the possibility of a recession. But the consensus is cautious optimism that we’re already seeing inflation come down and we’ll probably see an uptick in unemployment but not dramatic. Even the Wall Street Journal recently suggested that inflation is reaching a plateau.

Are there hopeful economic factors on the horizon in 2023 and beyond?

Even though there is definitely an element of wait-and-see, I am tacitly optimistic. Workers have made significant gains over the last few years and in most sectors job market prospects are still very good. The overall labor market remains quite strong, unionization rates are up and I think workers overall are in a much stronger position than they’ve been in for quite some time.

The number of job openings per seeker is still quite high and there are a couple of things to remember about headlines showing these dramatic numbers of layoffs by big, well-known firms. Tech companies ballooned up during the pandemic because they could provide things that others couldn’t during lockdown. Now there’s a necessary adjustment. But the tech sector is a tiny portion of the economy in terms of employment, only about two percent. So, while the numbers of layoffs feel really big, so far, we’re not seeing layoffs across most other sectors and that’s good news for our students and university community.