A year ago, American consumers had it good: COVID restrictions were reopened, stimulus money was jingling in their pockets, and real GDP growth was accelerating. But a year later, the economy faces tough challenges as inflation spikes, interest rates rise, and wages fail to keep pace with the cost of living whether a recession is imminent remains to be seen in 2023.

Employment

Employment is a paid work agreement between an employee and an employer that defines what the job entails, what the responsibilities are, the pay and conditions of the job, and the workplace rules. Typically, employment is filed with federal, state, and local government agencies such as the Internal Revenue Service (IRS).

A strong economy requires an active labour force to create new jobs and grow output. It also helps to increase wages so everyone can purchase the goods and services they need.

With record vacancies and acute talent shortages, employers need help finding people for specific positions, especially in tech and construction. This has made it more difficult for them to retain their employees, which has affected how companies look at up-skilling or re-skilling candidates.

Real GDP

Real GDP measures an economy’s total goods and services, accounting for price changes. It’s a more realistic way to assess the state of an economy.

The global economy recovered strongly in 2021, following the deepest recession in 150 years. The recovery has been aided by strong domestic demand. Still, growth will moderate as global reopenings diminish, China’s Covid restrictions and property slump drag, and the Russia-Ukraine conflict puts a brake on European growth.

Economic uncertainty continues to rise, with fast-tightening monetary policy and higher food and fuel prices continuing to pressure headline inflation. But domestic demand should pick up again as job growth remains strong. The US will remain a significant growth driver, although exports will cool as Europe’s geopolitical tensions and a rising dollar slow.

Inflation

When Congress approved fiscal deficit spending and the Fed enacted quantitative easing, the money supply surged to record levels. That created a massive increase in consumer demand and jump-started investments, such as homebuilding.

But this demand created price inflation in some categories, particularly durables and energy. Disruptions to global supply chains, geopolitical risks, and the semiconductor shortage pushed prices higher.

In 2022, many of these pressures will likely subside as production and capacity normalize. The decline in energy prices is also helping curb the impact of inflation.

But while these trends may be reversing, we are still determining. A few key factors, including rising interest rates and the potential for a recession, could increase inflation and interest rates in 2022.

Money Supply

The money supply affects the economy, and what happens to it is usually driven by the underlying demand and supply conditions in the market. However, the lag between the money supply thrusts and actual economic activity changes is often quite significant.

There are several ways to define the money supply, but they all begin with the same basic premise: a limited amount of liquidity is available in a given economy. This is why a country may measure money in one of four gradations, M1, M2, M3, or M4.

M1: The narrowest definition of money supply includes currency and demand deposits in the hands of the public. This includes notes and coins in circulation and traveller’s checks and demand deposits at banks.

M2 is a broader measure that includes savings and time deposits, and balances in retail money market mutual funds. These are called sweep accounts and are a form of liquid money with immediate liquidity.