December economic outlook: Is the past a guide to the future? Probably not

Quick takeaways

  • This year’s midterm results may translate into more of the same on the legislative front. But a key piece of retirement-focused legislation may help boost your savings.
  • The Fed is still pulling the interest rate lever up, but there are indications that’s not a forever strategy. Whether those in control of monetary policy can create a soft landing for a stressed economy remains to be seen.

Did the strains on your pocketbook soften, almost imperceptibly, at the end of 2022? For once, inflation showed signs of easing, which beat expectations. After all the economic uncertainty of 2022, that small bit of news served as a welcome relief.

But we all still have many questions about the economic outlook: Will the downward pull of pricing continue? With midterm elections in the rearview mirror, will legislators settle on an economic agenda? Most importantly, what’s the Fed up to? Here’s an end-of-year take.

Balancing an inflation-growth teeter totter

Despite spending almost $17 billion—yes, that’s “billion” with a “b”—on state and federal midterm elections, November 2022’s winners won’t dramatically shift the governing landscape. Yes, Congress is now divided—Democrats in control of the Senate, Republicans of the House—but Republican gains didn’t prove as overwhelming as many assumed they would be.

Whether that translates into a legislative agenda that may affect your wallet is another story. The best guess? More of the same—lots of lines around party membership, and little willingness to cooperate.

Where a lot of attention remains is on the Fed. Their policy decisions in the back half of 2022 focused on taming inflation. While there are some signs it may be beginning to work, it’s not without consumer pain, a fact that Fed chair Jerome Powell acknowledged. Translation? Interest rates—and with them mortgage and car loan rates—can’t be something the Fed pushes up forever.

“The Fed controls monetary policy, and they want to get back to a place with greater price stability,” says Heather Winston, director of individual solutions at Principal®.

Price stability, Winston says, isn’t the same as zero inflation: How much some things cost in the future will always fluctuate based on demand and supply. In general, inflation happens when demand chases a limited supply of goods; typically price growth then eventually slows. But Americans in 2022 are spending differently and supply chain woes continue to linger—thus inflation’s current durability.

That’s why today is a different confluence of events than the 1970s: Current unemployment numbers look far better, helping keep stagflation (long periods of high inflation coinciding with slow economic growth) at bay. “While consumers certainly lament prices for things like gas and food, they are still spending similarly to what they did in the fall. How long that continues, however, is a challenging guess,” Winston says.

Measured optimism remains the message: Inflation built slowly then more rapidly in 2022, and it will likely release its grip over time. The Fed knows balance is difficult but essential. “Imagine they’re on a teeter-totter: They want the economy to get where both feet, on both sides, are on the ground,” Winston says.

Your wallet: One proposed piece of legislation to watch right now: Secure Act 2.0. Advocates of the bill—which includes both incentives for employers to add retirement benefits and investment protections for employees—may make a final push to get it through the lame-duck Congress (composed of current and outgoing members before those newly elected are sworn in). No matter what happens to Secure Act 2.0, think about adding any year-end cash gifts or bonuses to your retirement account to give your savings a boost.

Taking a ride in an economic time machine

Contrast has defined much of the economic news of the last year and continues to do so now. Take inflation contrasted with unemployment, for example: Price increases are causing real pain for many; unemployment is not.

“When we’re in the midst of a difficult moment ourselves, we can recall past difficult moments, but they won’t exactly mirror what’s happening today,” Winston says. For example, hop in the way-back machine to 1992: Unemployment topped 7.5%, while the stock market was essentially flat. In 2010, unemployment was nearly triple what it is today—9.3%. That’s a lot of families who were out of work, combined with moments—such as in 2000 and 2008—when the bottom fell out of the stock market almost overnight.

“If I had told someone in the 1990s to just hang on for 20 years to their diversified investment portfolio and they’d experience unprecedented growth, they wouldn’t have believed me,” Winston says. “There aren’t any guarantees, but we have had growth in the markets and stability in low interest rates for a very long time.”

Right now, the market cycle has people reevaluating their financial goals—whether they can retire as planned, if they have to put more away in savings, if they can afford a mortgage. “How the economy translates into action depends on your needs and wants, but looking back is a good way of reminding ourselves that what’s happening now won’t always be so,” Winston says. “Things do turn around.”

Your wallet: The Fed is pretty hawkish at the moment, which has pumped the brakes on many people’s long-term goals. What doesn’t have to stop, however, is building on the pieces of your financial foundation. Investors can remain focused on quality holdings, diversification of the assets, and continued progress toward goals. When it comes to saving, “time is your friend,” Winston says. As you look to the next 12 months, what time-focused goals can you turn to? How about boosting your emergency savings, one small deposit at a time? Delaying retirement—even by a year or two? Or paying off one small debt? Those small moves make a big future impact.

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The views and opinions expressed are for informational and educational purposes only as of the date noted and should not be considered investment advice. No forecast based on the opinions expressed can be guaranteed and may be subject to change without notice. No investment strategy, such as diversification, can guarantee profit or protect against loss.

Investment advisory products offered through Principal Advised Services, LLC. Principal Advised Services is a member of the Principal Financial Group®, Des Moines, IA 50392.

Insurance products and plan administrative services provided through Principal Life Insurance Company®, Securities offered through Principal Securities, Inc., member SIPC and/or independent broker-dealers. Investment advisory products offered through Principal Advised Services, LLC.

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