text: Good afternoon. Here’s your Economic Early Warning for Thursday, 12 January 2023. ADMIN NOTE: After a hiatus, we’re bringing back the weekly Economic Early Warning report, published on Thursdays. We’re making this available for all subscribers for feedback as we work out the new format and analytic structure. – M.S. TODAY’S BRIEFING:InFocus: The Fed’s upside is deep, and downside is deeper heading into 2023Smart MoneyFed WatchEconomic WarningInFocus: The Fed’s upside is deep, and downside is deeper heading into 2023For the first time in over 50 years and only the third time in history (1931, 1969, and 2022), U.S. equity and bond markets both experienced losses, leaving investors few places to hide. A traditional balanced investment portfolio in the U.S. containing 60% stocks and 40% bonds saw its worst performance since 1932 when the U.S. was in the midst of the Great Depression. Globally, a staggering $36 trillion in market value was vaporized last year, nearly double the losses stemming from the global financial crisis of 2008. And we’re unlikely to have seen the market bottom.The Fed will continue steering conditions in 2023 as they try to reduce inflation and engineer a soft landing while attempting to avoid triggering a global financial crisis. Here’s the reality the Fed is facing:U.S. economic data from December showed downturns in both manufacturing and services. The Institute for Supply Management’s manufacturing index dipped to 48.4, while the Purchase Managers Index registered 49.6 percent, nearly seven points lower than in November. Both index readings are again in contraction territory (being below 50).American small businesses employ almost half (46.8%) of all private sector employees, making them an important barometer of economic health. This year 71% of small business owners reported at least a 20% increase in the cost of supplies and services–nearly triple the rate of official CPI (7.1%) and PPI (7.4%) increases reported by the U.S. Bureau of Labor Statistics. Additionally, delinquency rates for small business rent have escalated for the second month in a row, according to the “Small Business Rent Report” from Alignable Advisors. Some 41% of small business owners report not being able to pay their rent in full and on time.The National Federation of Independent Business (NFIB) Small Business Optimism Index shows that current sentiment is below the level of every prior recessionary period going back 30 years, with the lone exception being the global financial crisis of 2008. Small business optimism recently took out its COVID pandemic lockdown lows.Consumer spending drives nearly 70% of the U.S. economy. Spending has so far been bolstered by savings and credit, and U.S. savings are now hitting all-time lows. The personal savings rate is now the same level it was during the 2008 financial crisis (3.5%), while consumer debt is rising. According to the New York Fed’s “Quarterly Report on Household Debt and Credit” for the second quarter of this year, the aggregate household debt stands at a historic high of $16.10 trillion – an increase of $2 trillion since December of 2019, just before the onset of the pandemic. More than 80% of Chief Financial Officers (CFO) surveyed by CNBC expect a recession in 2023, with few respondents seeing the Fed’s hopes for a soft landing being possible.Mainstream economists point to a low unemployment rate, which is infamously poorly calculated, as a sign of a solid economy. But below the surface, the U.S. economy is deteriorating. Analysts disagree whether there will be a Fed “pivot.” One side says that the Fed will have no choice but to step in to cut rates headed into a deep recession, while the other side says the Fed wants to get inflation down first, then be more selective about how they get economic growth going again. Powell, however, has already warned markets he plans to make tough decisions that will be politically unpopular, which may mean there will be no Fed pivot.