Is the U.S. Economy Heading for a Recession?

WASHINGTON, Jan 19 – Retail sales in the United States experienced a significant drop in December, the largest decline in a year, due to decreased purchases of vehicles and various other goods. This has led to a weaker growth pattern for consumer spending and the economy as a whole heading into 2023. Additionally, this marks the second consecutive month of decreased retail sales, which primarily consist of goods, and is negatively impacting production at factories. Data from Wednesday also revealed that manufacturing output saw its largest decrease in nearly two years in December, and producer prices also decreased during the same time period.

Indications of declining demand and slowing inflation may prompt the Federal Reserve to slow the rate at which it raises interest rates in the coming month. However, the Fed is unlikely to halt its monetary policy tightening as the labor market remains strong. The Fed is currently in the midst of its most rapid rate hike period since the 1980s.

Retail sales experienced a significant decrease last month, with a 1.1% drop, the largest decline since December 2021. Additionally, the data for November was revised to show a 1.0% decrease instead of the previously reported 0.6% decrease. This decline was worse than what economists had predicted, which was a 0.8% decrease. However, it should be noted that retail sales did see a 6.0% increase compared to the same period the previous year.

It’s important to note that these retail sales figures are not adjusted for inflation. One possible reason for the decrease in sales in December could be a decrease in the prices of goods during that month. Additionally, holiday shopping may have been brought forward to October, as consumers sought to take advantage of discounts offered by retailers due to inflation concerns.

The decrease in sales at restaurants and bars during December was likely due to the cold snap, as well as the decrease in gasoline prices which affected service stations. Additionally, there has been a shift in spending toward services. Economists at Bank of America also noted that the government’s method for removing seasonal variations from data has not yet fully accounted for the change in holiday shopping patterns since the start of the pandemic.

There was a decrease in sales across multiple industries, including auto dealers, service stations, online retail, furniture stores, food services, and drinking places. Sales at electronics and appliance stores, clothing stores, and general merchandise stores also decreased. However, there were slight gains in sales at sporting goods, hobby, and musical instrument stores, as well as building material and garden equipment suppliers.

Last year, the Federal Reserve (Fed) significantly increased its policy rate by 425 basis points, moving it from a near-zero range to a range of 4.25%-4.50%. This was the highest policy rate since 2007. In December, the Fed projected that there would be at least an additional 75 basis points of rate hikes by the end of 2023. As a result, financial markets have anticipated a 25-basis point rate increase at the Fed’s upcoming meeting in January and February, as indicated by CME’s FedWatch Tool. However, this news caused stocks on Wall Street to fall while the dollar remained stable against other currencies and US Treasury prices rose.