Struggling to figure out what’s going on with the economy? You, I and economists the same.

The state of the economy is the puzzle that’s got even the professionals up all night.

Are we headed for a recession or not? Why is unemployment still so low if signs are pointing toward a recession?

Let’s catch you up to speed before going into 2023.

1. The housing market is falling

…But you didn’t need us to tell you that.

Analysts think the average US housing prices will fall 12% from top to bottom — one-third of the drop in the last housing bubble.

• Some estimates have the drop as high as 30%.
• For housing to be affordable, analysts believe housing prices need to fall 20%.

What we’re watching: Shelter costs (rent, hotels, insurance, owner payments) make up a third of the Consumer Price Index and take up the largest portion of consumer spending.

Yes, housing prices are falling — but it takes several quarters to reflect the changes — as contracts are typically renewed every 12 months.

Shelter costs was a major component of still-high inflation in October, but in the coming quarters, falling housing prices could help bring inflation down even further.

2. Oil and gas prices trend lower

Oil prices have been fluctuating non-stop on a few trigger events this year:

• Russian invasion leading to a European energy shortage.
• Re-opening (and closing) of China’s economy.
• Slowing economy bringing down demand.

US gas prices have fallen 30% from their peak, and OPIS’ Global Head of Energy Analysis, Tom Kloza, expects gas prices to continue falling into the holidays (WSJ).

What could bring prices down: China is experiencing its worst COVID-19 outbreak since the pandemic started.

What could bring prices up: The G-7 group of countries set a $60 cap on Russian oil last week — preventing companies from shipping Russian oil sold over $60.

Less money spent at the pump means more to spend elsewhere.

3. Recession odds are rising

We all saw it coming. Still, economists took their time debating whether we would hit one or not.

Per a WSJ survey, 63% of economists believe we’ll hit a recession in the next 12 months — up from 49% in July.

Economists aren’t always the quickest in predicting recessions…

• Economists are worried that the Fed can’t raise rates without causing a recession.
• They think it’ll be a relatively short recession (8 months).

4. Consumer demand is falling

Consumer savings are being depleted, and with Black Friday over and the holidays around the corner, retailers should be worried about what will follow.

According to The Conference Board’s survey, consumers are expected to spend less on gifts this holiday.

US manufacturing orders in China are down 40% per CNBC’s Supply Chain Heat Map data — with the port of LA seeing its quietest period since 2009.

While some retailers reported strong earnings last month, closely-watched retailer, Target, warned of a weak holiday season coming.

5. Employment remains strong

In November, non-farm payroll employment increased by 263K workers — higher than the expected 200K.

The unemployment rate also remained the same at 3.7%. Seems like all those tech layoffs haven’t translated to higher unemployment yet.

For every unemployed worker, there are still 1.7 jobs available. Down from the 2:1 ratio — but remains far higher than the average.

Which brings us to the employment dilemma:

• We’re wired to believe that low unemployment is good. Just not too low, especially when inflation remains too high for comfort.
• Low employment gives the Fed more reasons to raise interest rates — which could bring more pain to the economy.