:max_bytes(150000):strip_icc()/GettyImages-590303309-dafd661129c94a5ca84530404bb129c9.jpg?w=1920&resize=1920,1267&ssl=1 "The Economy Is Slowing Down. Is Recession Already Here?")
Key Takeaways
- Retail sales slowed for a second month in a row as inflation took its toll on household budgets.
- Manufacturers cut production on a broad range of products as businesses braced for an economic slowdown.
- The slowdown in activity is what the Federal Reserve was hoping for when it hiked rates. But it could suggest the economy might tip into a recession soon, or may already be in one, economists said.
Shoppers are buying less and factories are making less—in other words, the economy is slowing down, and might even have entered a recession.
Signs of a slowdown came on two fronts in reports Wednesday. Retail sales fell 1.1% in December, as consumers cut their spending in 10 out of the 13 major categories tracked by the Census Bureau. Businesses also hit the brakes, with U.S. manufacturing output falling 1.3% in December, the Federal Reserve said. Both were the second month of slowdowns in a row.
The decline in retail sales is especially ominous because if consumers and businesses both continue cutting back, the economy could slow to the point that it enters a recession. When people curtail their spending, companies cut back on employees that make the good or service that isn’t selling. Economists have been predicting for months that the Federal Reserve’s interest rate hikes could push the economy into a recession by making it too expensive to borrow money. If that does happen, the current job market where positions are plentiful—so far a bright spot for workers—could take a turn for the worse, economists said.
Taken together, the day’s data “reinforces the message that recession is on its way and we could in fact already be in it.” said James Knightley, chief U.S. economist at ING, in a commentary. “Companies are going to increasingly adopt defensive strategies so the strong jobs numbers—pretty much the only decent set of numbers right now—cannot continue in this environment,”
Inflation is partly responsible for the slowdown. Prices for products and services have rapidly increased since 2021, putting household budgets under pressure. Consumers have tapped into their savings and made purchases on credit cards to maintain their spending habits despite the price increases. But they may not be able to sustain this any longer.
Not only that but household finances have been caught in the crossfire of the Federal Reserve’s war against that very inflation. The central bank has hiked its benchmark interest rate by 4.25 percentage points since March, a move that’s raised costs on consumer borrowing for things like credit cards and car loans.
Note
The federal funds rate heavily influences interest rates throughout the economy, including those on credit cards and car loans, but it’s not the rate you get on those loans. Banks typically charge a set amount above their so-called prime rate. The prime rate moves in tandem with the fed funds rate, but it’s typically about 3 percentage points higher.
“American consumers are tightening their belts in the face of still-high inflation, rising credit costs, and shrinking wealth,” Sal Guatieri, senior economist at BMO Capital Markets, said in a commentary.
Businesses are tightening their belts too, and have cut production across a broad range of items from cars to computers to clothes, according to the Fed’s data on industrial production—an indication that they are bracing for reduced demand for their goods.
“It is evident that the manufacturing sector is already in recession,” economists at Wells Fargo Securities said in a commentary.
The Fed’s interest rate hikes and subsequent slowing of the economy appear to have had the intended effect. Inflation has slowed significantly in recent months, according to data on consumer prices. Not only that, but the producer price index, which measures wholesale prices, fell 0.5%, the Bureau of Labor Statistics said—and that could translate into lower prices on store shelves.
Taken together, the data intensified warning signs of a recession sometime this year—and that could mean layoffs, lower standards of living, and drained savings for many, among other hardships. Major stock indexes fell Wednesday as markets digested the news, with the S&P 500 sinking more than 1% on the day as of early afternoon.
“Investors started to realize a recession is coming,” Edward Moya, senior market analyst at OANDA, said in a commentary. “The economy is clearly in slowdown mode.”
The mounting signs of cooling prices and a slowing economy will likely encourage the Fed to slow down its anti-inflation rate hikes, economists said. Market watchers overwhelmingly expect the Fed to raise its benchmark interest rate by 25 basis points—the smallest increase since March—according to CME’s FedWatch tool, which analyzes trading data.
Have a question, comment, or story to share? You can reach Diccon at dhyatt@thebalance.com.