A Wonderful World? 2023 Outlook

Rates hikes by the Federal Reserve and weaker growth abroad will likely trigger a shallow recession in 2023.

Airplane in hangar
Diane Swonk

Diane Swonk

Chief Economist, KPMG US

+1 312-665-1000

A Wonderful World? 2023 Outlook
The silver lining is the eventual rebound when the Fed shifts to cutting interest rates.

Louis Armstrong recorded “What a Wonderful World” in 1967. The song was less about what the world was than what it could be. The Vietnam war was raging, protests were escalating and the civil rights movement was revealing deep divisions in the fabric of our culture.

Jobs were plentiful, but at a price: escalating inflation. The Federal Reserve clashed with the president when it raised rates to counter inflation. The pressure was so intense that the Fed stopped short of derailing inflation; by the end of the 1960s inflation had tripled.

The pressure from the White House intensified with a new president in 1969. The Fed bowed to pressure to stimulate to ensure the president’s reelection in 1972. That provided dry tinder for the stagflation that took root when OPEC cut oil production in 1973.

Former Fed Chairman Arthur Burns laid out his mistakes in a famous speech in 1979. The Fed failed to slay the inflation beast, not once but several times. One of his successors was in the audience and took the lessons to heart. Paul Volcker initiated two brutal, back-to-back recessions to slay what had become a more powerful beast in the early 1980s.

Wages collapsed, while the gap between wage and productivity growth widened; living standards deteriorated and inequality worsened. Former industrial meccas became ghost towns. Men were hit hardest as blue-collar jobs disappeared. Large swaths of the population were sidelined, seeding the political divisions we are enduring today.

Current Fed Chairman Jay Powell is a student of history. He is committed to avoiding past mistakes and has proven he can hold his ground against a hostile White House.

Powell and his colleagues know the reality we face, that it can be dealt with and there is a better world to be had on the other side. That is the metaphor embedded in Armstrong’s iconic song.

Inflation is like cancer. If left untreated, it can metastasize into a fatal condition. The Fed has a cure:  to catch it early and limit the pain of the treatment.

Powell laid out the threat we face in his most recent speech. A cooling of goods inflation and shelter costs will slow inflation but may not be enough to stop it from metastasizing. Service sector inflation is accelerating in the areas most sensitive to labor costs.

The Fed has limited tools. It can only hammer demand to meet an undersupplied world. Labor is among the most supply constrained.

Aging demographics, the pandemic and a sharp slowdown in legal immigration have left us with fewer workers than needed. Labor shortages are more structural than cyclical. A one-time rise in unemployment may not solve the problem; unemployment may have to remain higher, even after the Fed has derailed inflation.

The November employment report underscored the risks. Job gains continued to surge, while wages accelerated; wages in the service sector, where inflation is stickiest, drove those gains.

The Fed’s baseline forecast assumes rate hikes will stall the economy and raise unemployment. At the November meeting it concluded that risks were to the downside; the baseline and the probability of a full-blown recession were neck and neck. Either way, the economy will slow and unemployment will rise.

The silver lining is that Fed-induced recessions are easier to recover from than balance sheet recessions, like we saw in 2008-09. Household and large firm balance sheets are in better shape, which means they can more rapidly respond to the stimulus of a cut in rates when it occurs.

This special edition of Economic Compass looks at the outlook for 2023, how the slowdown is expected to play out by sector and what those shifts mean for different industries. Rate hikes are accelerating the pivot away from spending on goods to services. Millions are scrambling to escape their homes, step out with friends and feel the embrace of loved ones.

The pandemic-induced bubble is bursting. The industries that were winners are losing, while those that suffered the most from initial quarantines are winning.

Large firms have an upper hand as they have either paid down their debt or locked into low rates. Small and mid-size firms, including startups, are more sensitive to rate hikes. Industries will consolidate.

Executive Summary

Real GDP growth expanded at a revised 2.9% annual pace in the third quarter, reversing two quarters of declines. The overwhelming bulk of that “strength” was due to a sharp narrowing of the trade deficit. Exports surged as supply chain problems eased, while imports plummeted.

Prospects for the fourth quarter are worse, with real GDP rising less than 0.7%. Annual growth is expected to come in at 1.9% in 2022. Fourth- quarter-to-fourth-quarter real GDP growth, which more closely tracks momentum in the economy, is expected to slow to 0.3% in 2022.

Rate hikes by the Federal Reserve and weaker growth abroad are expected to trigger a shallow recession in 2023. Real GDP growth is expected to contract by 0.2% in 2023, while fourth-quarter-to-fourth-quarter growth drops by 0.3%. Fed-induced recessions are inherently easier to recover from than balance sheet recessions, like 2008-09.

Surging federal debt has limited the fiscal space that the federal government can tap to offset the impact of a recession; fiscal stimulus would also complicate the Fed’s battle against inflation.

The greatest threat to the outlook is a showdown over the lifting of the debt ceiling, which it is hoped will be avoided. The recent experience in the U.K. suggests that bond market participants have grown weary of such nonsense. Calmer heads in Congress on both sides of the aisle are doing their best to avert a showdown.

 

2023 Outlook

Anatomy of a Recession

Chart 1 compares the forecast with the last four recessions. The losses are expected to be close to the 2001 and 1990-91 recessions but well short of the carnage of 2008-09 or 2020. (The threshold is low.)

The subsequent recovery in 2024 is expected to be more robust than previous recoveries, except for the pandemic. The largest limit will be labor shortages, as they could cap our ability to generate new jobs while triggering another bout of inflation.

Unemployment Drifts Higher

Chart 2 shows that the unemployment rate is expected to approach 5.5% by year-end. That is low when compared with other recessions.

Rising retirements, ongoing staffing shortages and the desire by firms to hold onto workers they fought hard to hire are expected to dampen the impact on unemployment. Research by the Fed suggests that more than 2 million of the 3.5 million missing from the labor force are retirees.

Many older workers had COVID and are unable to work due to long COVID. Younger retirees are now needed to care for grandchildren and elderly parents, given acute labor shortages in childcare and long-term care.

This is in addition to the scars of the pandemic, which are adding to staffing shortages. The number of those out sick and unable to work hit 1.6 million in November; that left nearly 700,000 more people on the sidelines unable to work or seek work than in any month of the 2010s. Fatalities were larger here than elsewhere.

Chart 1: Mild Recession Ahead

GDP, Start of recession index = 100

Chart 2: Peak Unemployment Lower

Peak Unemployment Rate (%), by Cycle

Consumer Spending Sputters 

We generated more than 4.3 million new paychecks year-to-date. That is double the annual pace of payroll growth in the 2010s. Those gains boosted aggregate income growth and buoyed consumer demand, even as individuals lost ground to inflation.

A rise in the ranks of the unemployed and retirees will reverse those trends. Even a small loss in employment could mean a drop of more than six million paychecks between 2022 and 2023.

Credit card debt and “buy now, pay later” loans (BNPL) are surging after consumers paid them down during the pandemic. That is further buoying spending but faces limits; debt service burdens compound rapidly when rates are rising. The use of BNPL to pay for groceries is a sign of economic stress.

The saving rate plummeted to 2.3% in October, tying the 2005 low when many used equity in their homes as ATMs. Excess saving from the pandemic is dwindling. 

The recession in housing is another headwind. Home buying and building are the single largest triggers to additional spending; we repair and remodel the homes we just bought. Those shifts are starting to reverse, with spending on housing-related goods falling.

Consumer sentiment and confidence measures both retreated in November, and are either at or on the cusp of recession territory. Buying attitudes about homes and big-ticket items that tend to be financed, including vehicles, plummeted.

Rate hikes accelerated the pivot in spending on goods to services; they made the things we finance less affordable and the time we share more attractive. The downside is that the pent-up demand for services is less a driver of growth than that for goods. Holiday parties canceled and haircuts missed due to quarantines cannot be replaced, while the backlog on weddings is shrinking.

Consumer spending is expected to slow but not collapse in the fourth quarter. A drop in prices at the gas pump could provide an extra lift in December. OPEC + has decided to hold but not expand its production cuts. The worst of the weakness is likely to be felt in the Spring, as layoffs mount.

Winners and Losers: Hotels, resorts and restaurants are expected to hold up better, given the pent-up demand for travel and tourism. It is unclear how strong that market will remain as businesses curb travel budgets. The opening of Asian countries to travel should offset that weakness.

Large retailers have already been squeezed. They have not hesitated to push the costs of inventory management and transportation onto their suppliers. That is pushing stress down the economic food chain to middle and small businesses.

Vehicle dealers, who were able to reduce the costs of inventories as sales outpaced production, will see costs rise. Insurance on vehicles surged, along with the rates on loans to finance inventories.

Media and entertainment companies and consumer product companies have the most exposure to short-term debt. They will feel the squeeze of higher interest rates along with other cost pressures on their margins. Layoffs have already accelerated at many news and streaming services. Advertisers are pulling back; competition among news providers has intensified.

Health care is in a category all its own. Providers are squeezed on all sides. Labor costs are accelerating, burnout is high and consolidation is picking up. Healthcare providers rely heavily on short-term debt.

Housing Losses Compound

Single Family Homes

The contraction in single-family home buying and building in the second and third quarters was the worst since the subprime crisis. Mortgage applications were still down nearly 50% in November, despite a slight pickup in purchase applications when mortgage rates dipped below 7%.

Single-family home construction is expected to drop another 15% in the first half of 2023. Home construction is expected to bottom out in the second quarter once mortgage rates start to come down.

Housing affordability hit its lowest level since the mid-1980s in October; more than half of all first-time buyers were unable to afford a home by March; buying conditions have worsened since then. Speculative investors are pulling back. All-cash buyers who flip to rent are waiting for additional price cuts.

Home values are falling the fastest in what were the hottest second-tier markets. Hiring freezes in the tech sector are exacerbating declines; many cheaper markets saw astonishing appreciation due to the higher salaries tech workers brought with them. The national index peaked in June.

We expect the S&P Core Logic Case-Shiller home price index to drop 20% on a fourth-quarter-to-fourth-quarter basis in 2023. That would mark the first national decline in the series since 2011 and push prices to December 2020 levels.

Better underwriting standards and a smaller jump in unemployment is expected to keep foreclosures in check; the cushion in equity is substantial.

Inventories of homes for sale remain extremely low. Existing homeowners with fixed rates are staying put. A stunning 40% of homeowners have paid off their mortgages. Older homeowners prefer aging in place.

Millennials are aging into their peak home buying years. That suggests that housing could quickly rebound once rates drop and values settle. A rebound in sales and construction before the end of 2023 is likely. Supply will depend heavily on how willing older owners will be to leave their homes.

Multifamily

Multifamily construction is poised to correct after several banner years. Multifamily construction soared to the highest levels since 1986 during the first three quarters of 2022. Multifamily construction is expected to fall more than 30% in 2023.

Multifamily building permits peaked in July 2022 but remained elevated through October. Projects in the pipeline are at their highest since 1973. The Senior Loan Officer survey by the Fed shows that major banks have pulled back on lending and are already down to recession levels.

Apartment vacancies remain low with space scarce. Of course, that could be said of the single-family market as well, but that did not stop prices from falling and the market from cratering.

The Housing and Urban Development rent index dropped to its least affordable level on record in the third quarter of 2022. That is decimating demand. Household formation slowed dramatically in 2022.

College grads pulled back, opting to stay with parents or take on roommates. Foreign students, who absorbed luxury space in urban areas, remain scarce.

High frequency data show that rents have rolled over and begun to fall. That hasn’t stopped sticker shock for those renewing leases. Rents are still up substantially from a year ago. We expect a drop in 2023.

That could add to the weakness in the multifamily market. Some projects will get delayed; others will go under. Vulture funds may get their chance to pounce. The weakness in the multifamily market could linger.

Winners and Losers: Cap rates remain low for multifamily but could rise with a drop in rents. Rental lease companies could see a slowdown in activity. Tighter credit standards could hobble developers.

Single-family home builders, realtors, mortgage brokers and manufacturers of appliances, furniture and construction materials are expected to be hit hardest. Layoffs at finance companies have picked up along with cuts in housing-related manufacturing activity.

Business Investment Softens

Equipment Spending Falters

Backlogs for light vehicles, heavy trucks and aircraft remain strong, while backlogs are returning to pre-pandemic norms elsewhere. Supply chain glitches are abating as delivery times have fallen.

Core durable goods orders rebounded in October after falling in September. Gains in computer and information equipment were especially large. The latter reflects an upgrade in equipment that handles more sophisticated, artificial intelligence (AI) and cloud computing.

There is some evidence that the ultra-low rates of the 2010s discouraged business investment. Big decisions on infrastructure were delayed. That sets the stage for a potentially stronger recovery on the other side of the slump we are expecting.

Our own KPMG Insights on Inflation survey in the fourth quarter revealed that more than three quarters of businesses plan to invest in labor saving technologies. They understand that labor shortages are structural.

The manufacturing indices slipped below 50, a sign of contraction, while many of the Fed’s regional manufacturing indices cratered. The Chicago Purchasing Managers Index predicted the last eight recessions; it hit recession territory in November.

Nonresidential Construction

Office leasing has slowed after the initial push to bring workers into offices. Demand for contingent space is rising, as firms manage peak days. Firms are focused on the most high-tech and energy efficient space.

Small businesses are pulling back the most. One recent poll revealed that more than a third of small businesses could not pay their rent in October, a sharp jump from September.

Cities in the Northeast and Midwest (Chicago) are doing better than those in the West. San Francisco has suffered some of the largest losses. Suburban office markets initially held up better than those in the major cities but are now losing ground.

The outlook for industrial space is mixed. Large retailers and manufacturers have no desire to pay for the costs of carrying and transporting inventories – so much for just-in-case inventory systems. They are pushing those costs onto suppliers.

Warehousing for the last mile of goods to reach a customer has held up better. Online spending has come off from the peak of the pandemic but is settling into a higher trend.

Retail space is experiencing a bit of a resurgence, despite a slowdown in spending on goods. Much existing space is no longer desirable or usable and will be demolished. A portion of planned upgrades are likely to be delayed until credit conditions ease. Those projects will fuel the rebound when rates fall.

The oil sector, which drove gains in nonresidential investment in the 2010s, has been slow to ramp up. Capital discipline, labor shortages and constraints on refining capacity are limiting investment.

Large energy companies are leaning on renewables to ensure their longevity. Government subsidies and the surge in private sector funds committed to the transition from carbon fuels are amplifying those shifts.

Inventories Drain

The impetus to hoard as prices surged and shortages compounded overstated demand. That left retailers with unwanted inventories. It is what is known as the “bullwhip effect;” we are now feeling the sting.

Manufacturing inventories are in better shape than retail inventories. Appliance producers cut production over the summer to avoid a glut; the next shoe to drop will be a broader draining of manufacturing inventories.

Supply chains remain fragile. Ports in the U.S. have begun to levy fees on empty containers, while China is curbing shipments of empty containers abroad. Those shifts, coupled with efforts by shipping companies to stem the drop in shipping costs, could interfere with export supply chains in early 2023.

Winners and Losers: The transition to renewables is a bubble in the making. Investors are betting on the sector before they know what business models will work. A similar phenomenon occurred when railroads were built and when the internet gained critical mass. 

Construction of chip plants and electric battery and vehicle plants are expected to pick up, given government incentives. Investment in AI and labor-saving technologies should help buoy spending on intellectual property and robotics.

Leasing companies and developers in the industrial space are expected to do better than those in the office space. Manufacturing activity is expected to fall, driven by losses in heavy manufacturing. Appliances, furniture, construction materials are expected to be hit harder, at least initially, than manufacturers of heavy trucks and aircrafts. 

Deal volume is expected to remain suppressed until rates begin to fall and financial markets rally. Large investment banks are hunkering down, despite banner profits. Pension funds are pulling out of less liquid, long-term investments. Valuations will remain suppressed until interest rates recede.

Tighter credit standards and restrictive loan covenants will exacerbate the pressure on small and midsize firms. Now is the time for larger, less leveraged firms to seek deals. Consolidation will accelerate.

Government Spending Up Modestly 

Federal

Federal spending is falling in the fourth quarter as Congress struggles to pass a budget or continuing resolution during the lame duck session. The continuing resolution gets us to December 16; that is expected to be extended to just before Christmas to pressure Congress to cut a deal on the now expired fiscal 2023 budget.

One of the biggest boosts to federal spending in early 2023 is the 8.7% jump in Social Security payments, which is slated to hit in January. That complicates the job for the Fed, as those checks will be spent. 

Defense spending is expected to rise in response to the war in Ukraine, but actual funds for Ukraine are much smaller than most realize. They are barely rounding errors in our national budget.

Subsidies and incentives for electric vehicles, battery and semiconductor plants are ramping up factories faster than the larger infrastructure bill. That will buoy investments in those sectors. The bulk of the infrastructure bill is expected to hit in the mid-2020s.

There is hope that Congress can get a resolution on the debt ceiling before year-end. The debt ceiling is an antiquated law that was never meant as a weapon of mass destruction. It merely ensures we service the debt on loans the government has already taken out, not new spending. The U.S. suffered a downgrade in the quality of its debt the last time there was a showdown over the debt ceiling in 2011.

The recent experience in the U.K. suggests that bond investors are less tolerant of such nonsense today; the mere threat to default on our debt could trigger a sharp depreciation in the dollar and a rise in rates.

State & Local

State and local government coffers are in better shape. Soaring tax revenues, the cost savings associated with the pivot of schools online and pandemic aid bolstered balance sheets.

Some of the windfall gains were used to boost rainy day funds. Investments in infrastructure, tax holidays (notably on gas) and rebates picked up. What is left will buoy spending at the state and local levels in 2023.

Winners and Losers: Climate change initiatives including funding for clean energy and incentives for electric vehicle plants will spur investments there. Semiconductor plants will receive large subsidies but the complexity of the supply chain will be a hurdle to achieving independence from foreign suppliers.

The Internal Revenue Service (IRS) will be ramping up unless their budget is cut again. The IRS desperately needs to modernize its systems as well as staff up. This is a sticking point for more conservative members of Congress and could represent a hurdle to a larger budget resolution, but staffing the IRS would pay for itself and reduce the annual deficit.

The weakness will be in domestic programs, which could be squeezed by the slowdown in funding relative to inflation. A continuing resolution is particularly restrictive, given the current inflation environment. That means fewer federal government contracts.

State and local governments have yet to spend their pandemic aid, much of it targeted to improve the infrastructure of public schools. Those projects span HVAC systems to repairs and upgrades to buildings.

Chart 3: Global Growth Slowing

GDP, Annual Percent Change

Trade Deficit No Longer a Buffer

Global Growth Weakens 

Chart 3 shows the KPMG forecast for global growth. The global economy is expected to slip below 2% in 2023. That is recession territory for much of the world; it means that many countries will lose ground on a per capita basis.

Developing economies, which were the drivers of economic growth, are struggling along with many developed economies. China should pick up in 2023, given weak 2022 comparisons and an easing of zero-COVID policies but gains are expected to remain a fraction of what the country experienced in the 2010s.

China’s real estate sector remains over-leveraged. The government is attempting to blunt the blow with more targeted stimulus, but it is unclear how much it can accomplish. Exports, which are the primary driver of China’s economy, are expected to slow in response to weakness abroad and a decoupling of supply chains.

The pandemic and geopolitical tensions accelerated the regionalization of supply chains and “friend shoring.” Firms must be more careful about with whom and where they do business, rather than where the cost of production is cheapest.

ASEAN countries with younger populations are seeing an influx of foreign investment, which is helping them grow and accelerating the move away from China. Latin America, notably Mexico, also wins in that world. The United States Mexico Canada Agreement on trade (USMCA), which was upgraded to include intellectual property protections, makes trade with Mexico a safer long-term bet.

Smaller developing economies are in worse financial shape than larger countries. The need to subsidize food and energy has stressed government budgets; ten countries are already in, or have a very high probability of, default in the next year.

The concern is contagion and the risk that small fires could kindle a larger blaze. It was not on my bingo card that the U.K., a developed economy, would be one of the first to test the limits of what they could do with record tax cuts. The bond vigilantes are back.

The good news is that energy prices have come off of the peak hit after Russia invaded Ukraine. Weak global growth and a stockpiling of liquified natural gas (LNG) in Europe helped. The larger problem may be next winter when Europe has depleted what was left of the oil from Russia.

The largest headwinds are rate hikes. Central banks are raising rates the world over and are far from done. Those hikes will show up as additional weakness in 2023. The exception might be Latin America, including Brazil, which was earlier to hike rates.

Trade Deficit Modestly Narrows

A surge in the value of the dollar, the lags that are built into dollar-denominated contracts and a weakening of growth abroad suggest that exports will soften in the first half of 2023. Those shifts will dampen any improvement in trade related to a slowdown in imports early next year.

That marks a sharp shift for the trade deficit, which narrowed over the summer. Trade will not provide the buffer to growth it usually does in a recession.

Winners and Losers: Companies will be scrambling to hedge their currency bets and reprice imports. Corporate tax strategies may need to be revisited. Logistics firms should do well as companies adjust their outsourcing activities to a more protectionist and hostile geopolitical environment.

Foreign transplants, which rely more on imports to source their inputs, should do better than domestic producers. Multinational companies, which are more exposed to currency shifts and geopolitical risks, will lag. Heavy manufacturing tends to be hit the hardest by shifts in the dollar, which can take years to play out.

Chart 4: Inflation Cools Faster

Core PCE Percent Change, 4Q/4Q

Chart 5: Fed Funds Rate Peaks at 5.5%

Percentage Point Change from First Rate Hike

Chart 6: Yields Peak in Q2 2023

10-Year Treasury Note Yield at Constant Maturity, Percent

Inflation Slowly Cools

Chart 4 shows the forecast for inflation. We expect the core personal consumption expenditures (PCE) index, which the Fed targets at 2%, to slow faster than the Fed expected in its last round of forecasts. A recession is the primary reason for cooler inflation:

  • Supply chain problems, which account for little more than half of inflation, are receding.
  • Commodity prices have come off of their highs and are now falling.
  • Home values and rents are cooling rapidly.

The problem is core service sector inflation outside of shelter. That category spans from spending on health care to education, haircuts and hospitality. The most recent PCE data revealed that those costs were still accelerating; a surge in the cost of labor is playing a key role in those gains.

History has taught us that the longer inflation remains elevated, the more it gets baked into contracts and becomes self-feeding. Workers begin to demand cost of living adjustments or COLAs in wages, while companies put escalators tied to the Consumer Price Index (CPI) in their contracts. The vehicle industry is renegotiating contracts next year and worried about the desire for COLAs.

The Fed believes that we need wages to slow to between 3-4% to ensure inflation does not become self-feeding. Average hourly earnings jumped back above 5% on an annual basis in November.

Fed Hits Brakes Harder

Chart 5 shows the forecast for the fed funds rate. The November unemployment report put a 0.75% rate hike back on the table but we think Powell and his colleagues will stick to a 0.5% hike in December and signal a higher terminal fed funds rate. The fed funds rate is now expected to peak at 5.5%, 0.75% higher than the Fed expected in September.

The Fed is expected to raise its estimate for unemployment and further reduce its forecasts for growth in 2023. The Fed currently does not plan to cut rates until 2024.

We expect aggressive rate cuts in the latter part of 2023, with inflation cooling in response to an actual recession. But don’t expect a return to zero rates anytime soon.

The Fed has concluded that the noninflationary rate of unemployment (NAIRU) has moved up with the pandemic. That means higher rates and higher unemployment on the other side of the current bout of inflation. That reality has yet to set in.

The Fed’s balance sheet has fallen by nearly $400 billion since its peak in June. Reductions in its Treasury bond holdings have fallen faster than its holdings of mortgage-backed securities.

Liquidity in the Treasury bond market has grown thin as the Fed has pulled back. It will likely have to stop well short of its goal to reduce the balance sheet by $3 trillion. Powell admitted as much in the question and answer portion of his most recent speech.

Treasury Yields Up, Markets Volatile

Chart 6 shows the forecast for 10-year bond yields. Bond yields are expected to peak in the second quarter of 2023.

The yield curve, or the difference between short- and long-term yields, has inverted. That can be a sign of a recession. The Fed’s reduction in its bloated balance sheet is exacerbating that signal. Our model of recession based off of the yield curve inversion shows the highest probability of a recession since 1982.

Stock prices should rally once an end in rate hikes becomes apparent. The problem is getting from here to there. A slowdown in demand, margin compression and higher rates are all expected to take a toll on stock returns in the near term.

Our model suggests that the S&P 500 could slip another 5-7% from recent levels before rebounding in the fourth quarter of 2023. The model shows the S&P 500 ending 2023 about 5% above where it was as of the writing of this report.

 

Bottom Line

The world is not wonderful but with a containment of inflation it could be much better than it is. The road from here to there is littered with potholes. Sectors of the economy that benefitted from the pivot online and shift to work from home are losing, while those that suffered the worst during initial lockdowns are winning.

Small and midsize companies and industries that rely more on debt are suffering, while large firms that locked into low rates are insulated. New business formation will slow, deal volume will remain suppressed and consolidation within industries will accelerate. The exception may be renewables, which are still in early development.

The pandemic accelerated many trends in place which catapulted us from a world in which growth and inflation were tepid and change was slow to one that is more volatile and requires more agility and resilience. That does not make it good or bad, just different. Firms that lean into those shifts will find opportunity; those that don’t will lag.

I will end where I started, with Louis Armstrong’s iconic hit. After sharing time with my 20-something children in recent weeks, one verse stood out:

I hear babies cry

I watch them grow

They’ll learn more

Than I will ever know

And I think to myself

What a wonderful world.

I know how heart-wrenching a cancer diagnosis is and how lucky I am to have caught several early. My kids proved a beacon of light in what seemed an ocean of darkness. May the economy be as fortunate, and our youth continue to inspire us with their brilliance. Happy holidays.