Upon assessing the year-end economic situation, one continues to find a two-faced economy.1 One face, the one reflecting inflation, supply bottlenecks, and GDP growth, is unsmiling and, at times, even frowning. Yes, as measured by the all-item monthly Consumer Price Index (CPI), the overall price level grew at 7.7 percent in October, slightly less than the 8.2 percent registered in September, but far above the 2.0 percent inflation target of the Federal Reserve (Fed).2 When stripped of food and energy, the October index continued apace at a 6.3 percent annual rate.

Thus far, stalwart efforts by the Fed to control inflation, which began in March 2022, are not showing up in monthly CPI readings or in the Fed’s preferred measure, the Personal Consumption Expenditures index, which is released by the Bureau of Economic Analysis. The index annual growth rate for September was 6.2 percent, the same as for August.3 Unfortunately, COVID-19 and the Russo-Ukrainian War have generated bottlenecks, and supply disruptions are still present. And even with the third quarter’s 2.9 percent growth in real GDP,4 which was driven heavily by petroleum product exports to Europe, hardly anyone will be popping corks to celebrate.

When the second quarter’s −1.6 percent growth and the first quarter’s −0.6 percent growth are accounted for,5 and if one assumes the fourth quarter’s growth will be slightly positive, growth for the year is still likely to be less than 2.0 percent. Forecasters see an even weaker 2023 ahead. For example, Wells Fargo is calling for −0.1 percent growth for 2023,6 and the Wall Street Journal looks to see 0.4 percent real GDP growth.7 Yet while the Fed’s tightening has had little effect on inflation so far, the associated interest rate run-up has created serious challenges in credit and exchange markets. The yield on 10-year Treasury notes rose from 2.48 percent on March 25 to 3.67 percent on November 16.8 As a result, housing and related construction activity have taken it on the chin, and the relative value of the dollar has risen significantly. Global trade patterns have been seriously disturbed, as has the ability of debtor nations that pay with dollars to cover their debt payments. Some of these tensions are beginning to ease as the European Central Bank and the Bank of England raise interest rates to levels similar to those in United States.