The Economy’s Yearly Recap

1/1/23 - 12/29/23

Raymond Lin

As 2023 wraps up, it’s fitting that we should take a moment to reflect on what occurred this year and its effects on the future. So, in this week’s edition of Phi Fiscal, we’ll be taking a look at 5 major events that occurred this year and their significance.

This Year’s Prominent Events

The Rise of AI

• AI has indubitably become one of the most prominent pieces of technology in 2023. This immense interest in AI, although strong for much of the recent past, exploded in 2023 thanks to the release of ChatGPT, a generative AI that seemed to truly surpass prior generative AIs and provide great utility. 

• ChatGPT was immensely capable at a number of tasks, especially as its creator OpenAI updated it and made it even better. This has led to the belief that AI will bring about reductions in menial tasks, greater innovation and efficiency, and increased engagement at work. As a result of this seemingly fantastical innovation, many companies jumped on the AI bandwagon. 80% of Fortune 500 companies have used it and 16% of American workers regularly use it at work. Additionally, 57% of American workers say they have at least tried it before. 

• This excitement and extensive usage of AI can also be found in the words and actions of companies. The number of S&P 500 companies mentioning AI in their earnings calls almost doubled from 2022 to 2023. Furthermore, many companies now openly espouse the usage of AI in their products or services, with some tech companies launching their own versions of ChatGPT like Google’s Bard, Meta’s LLaMA 2, and many other generative AI. 

• As we enter 2024, it is likely that AI will only continue to grow as it becomes better utilized and more advanced, with companies like Nvidia, OpenAI, Microsoft, and many others benefiting greatly from it.

Labor Movements

• 2023 saw 354 strikes involving about 492,000 workers as of October 31, exceeding the same period in 2021 and 2022 by 8 times and 4 times respectively. Many of these strikes have succeeded and secured better conditions for their members. These strikes and associated movements have become active thanks to high inflation, underlying discontent, and new determined leadership at unions. 

• These factors culminated in movements like the…

  • Writer’s Guild of America’s(WGA) strike, which sought and achieved better working conditions and pay as well as guidelines against AI

  • SAG-AFTRA strike, which occurred in tandem with the WGA’s strike to secure actors similar work improvements and protections

  • United Auto Workers’ strike, which invovled strikes at the Big 3 US automakers and secured a massive rewarding deal for its members.

  • Teamsters strike, which guaranteed better pay and condition for UPS workers around the country

  • Strike of healthcare workers’ unions at Kaiser Permanente, which achieved better pay and increased staff.

• Furthermore, 60% of strikes occurred in units of 100 or less workers, meaning labor movements were even more successful than their bountiful success initially appeared. All in all, labor movements have won a string of victories and organized effectively in 2023 and may possibly continue in 2024. 

Banking Collapse

• Earlier this year, the higher interest rates intended to combat inflation caused a significant banking panic that was successfully contained and, curiously enough, almost forgotten for much of this year. 

• This began with Silicon Valley Bank(SVB), a mid-sized bank that went from $56 billion to $209 billion in assets from 2018-2022. A large contributor to this was that SVB served many silicon valley companies and employees, such as entrepreneurs in technology, health care, and private equity. 

• This swell in assets left SVB with excess cash that it subsequently invested into bonds. However, these bonds lost value as interest rates and bond yields rose, causing an immense paper loss. When SVB was forced to realize these losses, a panic began among its customers that led to SVB becoming insolvent. This triggered a wider panic that, even with government FDIC assurances, led to Silicon Valley Bank, Signature Bank, and First Republic Bank collapsing. 

• It was quite the shock to see this given that they were seemingly fine up until recently and were the 16th, 29th, and 14th largest US banks by assets at the end of 2022. It serves as a reminder that the free and fun economic times of low interest rates are gone and that we are entering an era that requires risk management and diligence. 

• While sharing a similar impetus, Credit Suisse’s floundering and forced acquisition by its rival UBS had systemic causes unique to Credit Suisse. Nonetheless, it was also a surprising development in the banking world to see a systematically important bank slowly decline and be absorbed into another bank. 

2023’s Deal Flow

• Global mergers and acquisition(M&A) activity fell precipitously in 2023, reaching just $3 trillion. This is a 18% decline from 2022 and the lowest level of M&A activity since 2013. Fortunately, the US only had its M&A activity decline by 8%, which may be a staggering amount but is less than Europe’s 32% decline, Asia’s 20% decline, and the aforementioned 18% global decline.

• Two major factors have contributed to this precipitous decline in global M&A activity: a significantly weaker global economy and high interest rates. These two have led to less interest in M&A deals as the rewards are limited due to weak economic growth and the costs of borrowing are high due to high interest rates. 

• The US is a little different in that it has had strong economic growth, but its deal flow still suffers from high borrowing costs from interest rates. Additionally, US M&A activity faces another barrier in the form of the federal government. The US government has been applying strict regulatory scrutiny, and, while it may be for good reason, this scrutiny has led to longer M&A timeframes and increased risk of failure, discouraging M&A activity.

• However, there is room for optimism in 2024 due to the potential rate cuts in 2024, the growing need to invest in green energy, the interest and investment in AI, and the robust pipeline of deals in 2024. 

The Soft Landing

• When 2023 began, inflation was down from its 9.1% peak in June 2022, but it was still at 6.5%, an extremely high level for the American economy and people at large. To combat this high inflation, the Federal Reserve raised interest rates, raising the cost of borrowing and hurting economic growth to lower demand, weaken the labor market, and ensure that inflation fell.

• At the time, many thought that the US economy would enter a recession due to these interest rate hikes. However, 2023 has seen both decreasing inflation and consistent economic and consumer spending growth, with inflation measured by the Personal Consumption Expenditures falling to just 2.6% in November and US real GDP growing 4.9% in Q3. This fall in inflation and strong economic growth suggests that the US has managed to achieve a soft landing from its 9.1% inflation in 2022.

• This success has sparked optimism among many that the US economy will remain robust and that the Federal Reserve will cut interest rates soon in early 2024, both of which will be great for companies, the stock market, and ordinary people. 

Weekly Question

How much has the S&P 500 risen YTD?

• A: 9%

• B: 4%

• C: 16%

• D: 25%

Answer: Sometimes, you have to wonder if you’re dumb for not choosing to dump all your money into an index fund. This year is certainly one of those moments as the S&P 500 rose an eye-watering 25% in 2023, likely beating many actively managed portfolios out there.