Concerns over the U.S reaching its debt ceiling – compounded by political risks and pressures –will influence the country’s economy in 2023, says Virginia Tech economist David Bieri.

What key factors will impact the economic forecast?

“At the international level, the final global ripples from the COVID crisis will continue to play a key role, particularly with regards to lingering supply-chain issues affecting one of the U.S.’s most important counterpart for international trade, China,” said Bieri. “The geopolitical ripples of the continued war in the Ukraine and the dislocation of international energy markets will also continue to play an unpredictable, yet important role.”

Bieri says on the domestic front, economic threats from inflation and an overheating labor market remain key factors that affect the economic forecast for the current year, as they did for much of last year.

“While the feds might be able to loosen its aggressive monetary stance, political threats to economic stability might emanate from fiscal policy that the Treasury Department expects to begin taking “extraordinary measures” to continue paying the government’s obligations ahead of what’s expected to be a big fight to raise the borrowing cap,” said Bieri.

“With the U.S. already reaching its debt limit, there are some first signs of resistance by House Republicans to lifting the borrowing cap that could put the economy at risk as an intense fight in Congress over spending and deficits will dictate much for the fiscal climate for the rest of the year.”

Will the U.S. economy avoid a recession in 2023?

Bieri says that it’s difficult to predict with certainty whether or not the U.S. economy will avoid a recession in 2023, as there are many factors that can influence the economy and potential future events that could lead to a recession.

“I am much more optimistic and do not think that a recession is necessary to tame inflation,” said Bieri. “A continued period of below-potential growth can gradually rebalance supply and demand in the labor market and dampen wage and price pressures with a much more limited increase in the unemployment rate than historical relationships would suggest.”

“While the current historic tightness in the labor market (3.5 percent unemployment rate in December 2022) will continue to put upward pressure on wages (and thus prices), this also indicates that there are plenty of job opportunities for workers, which can lead to increased consumer spending and economic growth. Additionally, GDP growth has been steady, registering 2.4% in 2022, and expected to grow by around 3.5% in 2023,” said Bieri.

“The Federal Reserve also recently announced that they will slow the pace of rate increases in the near future, which can help to keep borrowing costs low and encourage economic growth. At the same time, however, a first rate cut in the Fed’s target rate is not predicted to occur before early next year.”

Bieri points to other potential risks that could lead the economy into a recession, such as the ongoing trade tensions between the U.S. and other countries that could lead to decreased economic activity and job losses.

About Bieri

David Bieri is an associate professor in the School of Public and International Affairs and an associate professor of economics. He also holds an appointment in the Global Forum on Urban and Regional Resilience. His teaching interests are at the intersection of public finance, monetary theory and history of economic thought. He has held various senior positions at the Bank for International Settlements in Basel, Switzerland. Prior to his work in central banking, he worked as in investment banking in London and Zurich. View Bieri’s full bio.

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