With the books closed on 2022, it is time to take stock and calibrate our expectations for the 12 months ahead. As we sit here today, in our industry and throughout the economy as a whole, we are in a corrective environment. However, the upshot is that, in our baseline forecasts, the economy is equipped and capable of absorbing a mild recession without triggering a 2008 (or pandemic shutdown) style event.

One unknown clouding the outlook is the Federal Reserve’s ongoing monetary tightening as it seeks to slow runaway inflation. The Fed moved its policy rate up by 425 bps between March and December last year.

Even as the pace of inflation and interest rate increases have slowed in recent months, markets believe the tightening cycle has more runway ahead — a sentiment echoed in Federal Reserve Chairman Jerome Powell’s public statements (Chart 1).

Of course, the central bank is mindful of the fact that changes in monetary policy impact the economy with a lag. As a result, it risks overshooting its target and tightening by more than is needed. Still, the Fed has stated it will engage in monetary policy that balances the importance of price stability with strong employment to maximize the likelihood of a soft landing.

Special Report | Spring 2023

Risk Factors Abound Front and center on the list of concerns for rental housing investors heading into next year are the business cycle and macro economy. Changes in the macro environment impact capital availability, tenant and buyer spending power, and risk appetites generally. While our median forecast for the year ahead calls for the economy to bend rather than break, the scope of uncertainty is broader today than it was before the pandemic. Beyond ongoing geopolitical tensions, several sources of concern are capable of triggering a severe contraction in 2023.

One of these significant risk factors is the sustainability of consumer activity. Thus far, despite a pervasive nervousness surrounding inflation and the economy’s year-ahead prospects, consumers have remained resilient and have not cut back on spending. Personal consumption expenditures are up through October by 7.9% from a year earlier. Even after accounting for the impact of inflation, consumption is 1.8% above last year’s levels

A tight labor market and healthy levels of wage growth have, up until this point, allowed consumers to postpone a spending curtailment.

HOWARD ZELIN