US Economy Shows Signs Of Cooling Even As The Labor Market Holds Strong
The US economy showed signs of slowing with retail sales and manufacturing dropping last month, but the labor market remained resilient as employers largely hold onto workers.
(Bloomberg) -- The US economy showed signs of slowing with retail sales and manufacturing dropping last month, but the labor market remained resilient as employers largely hold onto workers.
Retail sales fell in November by the most in nearly a year in a broad-based decline reflecting the strain of inflation and a shift toward spending on services. Several factory gauges showed contraction in data out Thursday, burdened by higher borrowing costs and weaker demand.
One bright spot continues to be the labor market, as initial applications for unemployment benefits fell last week to the lowest in two months. However, a separate measure of unemployed workers who’ve been out of a job for a longer period has climbed to the highest since February.
Taken together, the data point to a slowdown into the end of the year, which should be welcomed by Federal Reserve officials who are trying to lower growth in order to stamp out inflation. Policymakers forecast gross domestic product will barely expand this year and next, according to projections out Wednesday, intensifying recession concerns.
“Households are still tapping excess savings and benefiting from robust wage gains, but both tailwinds will wane next year, especially if the Fed keeps raising rates,” Sal Guatieri, senior economist at BMO Capital Markets, said in a note.
Fed Chair Jerome Powell said Wednesday the central bank still has a ways to go in hiking interest rates to a level it deems “sufficiently restrictive.” While inflation has slowed in recent months, Powell said the labor market remains far too tight and wage growth risks feeding into price pressures.
That’s been supportive of consumer spending — by far the largest contributor to economic growth. But the weak retail sales report “indicates that the Fed’s rate hikes are starting to bite,” according to Bloomberg Economics.
So-called control group sales — which are used to calculate gross domestic product and exclude food services, auto dealers, building materials stores and gasoline stations — fell 0.2%, missing estimates for a 0.1% gain.
While the November figure was disappointing, several economists noted the strong spending data from October, suggesting that consumers started their holiday shopping early this year as retailers extended deep discounts. Also, the report doesn’t capture much of services spending, where Americans have been shifting more of their dollars.
What’s less clear is how long that momentum can last, especially as Americans are increasingly tapping into savings and relying on credit cards.
“We are on alert for a sharp slowdown in the first quarter, as a softer labor market makes people less willing to run down savings accumulated during Covid to maintain elevated consumption,” Kieran Clancy, senior US economist at Pantheon Macroeconomics, said in a note.
The shift away from goods has hit the manufacturing sector. Factory production fell last month for the first time since June, while regional Fed surveys showed manufacturing weakened by more than expected in both the New York and Philadelphia areas.
In Philadelphia, new orders fell for a seventh month to the lowest since April 2020.
What Bloomberg Economics Says...
“Global demand is waning fast. China’s economy continues to struggle, while we expect the euro-area to enter recession in 4Q and the UK to already be in one. This all adds to a challenging outlook.”
— Niraj Shah, economist
To read the full note, click here
The jobs market, however, isn’t buckling. Hiring and wage growth have remained robust, and initial unemployment claims remain historically low. Still, the recent rise in recurring applications suggests people are having a hard time finding a new job, and unemployment is projected to rise.
“On balance, though, the claims data paint a picture of a labor market that is still too tight for the Fed and will leave the Fed on track to continue to raise rates further in 2023,” Oxford Economics’ Nancy Vanden Houten and Ryan Sweet said in a note.
--With assistance from and .
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