Inflation, financial woes weigh down American optimism for 2023

The financial outlook for many Americans does not appear to be bright, as many continue to cope with high inflation and financial worries. In fact, according to the New Year’s Resolutions Study from Allianz Life Insurance Company of North America, more Americans say their financial situation is worse than it was a year ago – and don’t expect it to improve in 2023.

“This has been a tough year for Americans with inflation creating havoc with their finances,” said Kelly LaVigne, vice president of consumer insights, Allianz Life. “These challenges aren’t going to go away when we flip the calendar, so it is best to make a plan for mitigating ongoing risks to financial stability like inflation and market volatility in the year ahead.”

Reasons for pessimism

Inflation at 40-year highs is a major driver of this economic pessimism, the survey said. The top worry in 2022 is the rising cost of living. More than half (52%) of respondents say rising inflation is the first or second most worrisome threat in the next year. This is up from 38% in 2021.

Inflation is also viewed as the greatest risk to retirement plans. More than one in three (36%) say rising inflation is the greatest threat to retirement savings and retirement plans in the coming year, up from 25% in 2021, and 8% in 2020. While the COVID-19 pandemic was the top concern in 2021, those worries have subsided.

While about half (49%) of Americans say their financial stress was about the same in 2022 as was in 2021, 35% say they felt more stressed in the past year. Gen Xers (41%) are more likely than millennials (36%) or boomers (27%) to feel more stressed financially in 2022, according to the survey.

Many Americans think that things will get worse in the coming year with a recession looming. In 2023, an increasing number say they expect their financial situation to get worse (currently 18% up from 12% last year).

Millennials are the most optimistic for 2023 with 44% expecting their financial situation to improve in 2023, compared to 25% of Gen Xers and 16% of boomers. Gen Xers (34%) are more likely than boomers (31%) or millennials (21%) to say their financial situation worsened over the last year.

Resolutions for 2023

One bright spot is that fewer Americans say they have bad financial habits this year. Americans who say they spend too much is trending down (currently 26%; compared with 28% in 2021 and 32% in 2020). Still, 17% say their worst financial habit is spending more than they make and 15% say they have no household budget.

Despite the added worry around finances in 2022, this may be motivating more people to make and keep New Year’s resolutions to manage money better and save more. Nearly one-third (32%) rank financial stability as their top focus area for next year, up from 23% in 2020.

The percentage of Americans who are including financial planning as a resolution increased to 18%. This is up from recent years but not as high as coming out of the Great Recession when 33% said they would include financial planning in their resolutions in both 2009 and 2010.
Plans for improving finances.

So what are Americans planning on doing to manage their finances better? According to the survey, the below steps are among the top ways people want to improve their finances:

• Build up an emergency fund, 21%
• Pay down credit cards, 17%
• Increase retirement savings, 14%
• Make a budget, 12%

In addition, more people say they are willing to seek out advice from a financial professional in the coming year. One in three (33%) Americans say they are more likely to seek out the advice of a financial professional in 2023, compared with just 22% in 2021.

Also, many Americans anticipate a job change to alter their finances in the coming year. More than half (53%) of Americans say they are likely to start or continue searching for a new job in 2023. Among those who are likely to search for a new job in 2023, 42% say salary or low pay for their skillset would be the top reason. This was followed by lack of opportunity to advance career (26%), lack of flexibility to work when or where desired (25%), and toxic company culture or workplace (25%).

Allianz Life conducted an online survey, the 2022 New Year’s Resolutions Study, in November 2022, with a nationally representative sample of 1,000 respondents.

Recession ahead, followed by rebound

Amid this doom and gloom, Americans can look forward to some relief late in 2023. Wells Fargo Investment Institute (WFII) has released its “2023 Outlook: Recession, Recovery, and Rebound,” which outlines WFII’s expectations for a recession in the first half of 2023, recovery around midyear, and a rebound that gains strength into year-end.

The report looks closely at three key drivers: inflation, interest rates, and corporate earnings. WFII believes that the decline of inflation will be a dominant theme in 2023, shaping the trajectory of economic growth and interest rates.

Highlights of WFII’s forecast include:

• A recession and unwinding of inflationary shocks of the past 18 months could allow inflation to decline to under 3% on a year-over-year basis by year-end 2023.
• A moderate recession in the first half of 2023 may lead to a contraction for the year as a whole, marked by -1.3% U.S. GDP (gross domestic product) growth.
• Once investors begin to anticipate economic and earnings recovery, the S&P 500 Index is forecasted to gain into year-end. S&P 500 Index target range is 4,300 – 4,500 for year-end 2023.
•  Federal funds rate forecast of 3.50% – 3.75% anticipates multiple policy interest-rate reductions after rates reach a peak above 4.50% early in 2023.

“The unfavorable risk-reward balance in both equities and fixed income jolted portfolio performance in 2022 and tilted our guidance more defensively for most of the year,” said Darrell Cronk, chief investment officer for Wells Fargo Wealth & Investment Management. “And while we expect an economic recovery after midyear, we anticipate 2023 will be a volatile and challenging year for investors as we transition from a recession to a recovery, yet we believe that it may create strong opportunities to reposition for growth and back into a more pro-risk stance as the next economic recovery and bull market emerges.”

 

Ayo Mseka has more than 30 years of experience reporting on the financial services industry. She formerly served as editor-in-chief of NAIFA’s Advisor Today magazine. Contact her at [email protected]. 

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