Dive Brief:
- Retail sales declined 1.1% last month and factory output fell 1.3%, bolstering forecasts of recession this year as the Federal Reserve presses on with the most aggressive monetary tightening in four decades.
- Businesses “generally expect little growth in the months ahead,” the Fed said Wednesday in its so-called Beige Book compilation of reports from its 12 district banks. Half of the regional banks reported no change or a decline in economic activity.
- In another sign that the economy is cooling, the Producer Price Index — a measure of what suppliers charge — rose 6.2% in December from a year earlier in the slowest 12-month pace since March 2021, the Labor Department said Wednesday. The PPI increased at a 7.4% annual rate in November after surging 11.7% in March.
Dive Insight:
The reports on the economy Wednesday highlighted how the central bank’s fight against inflation may yield mixed results in the weeks ahead, easing price pressures but slowing economic growth.
“Central bank rate increases have started to have an impact on inflation, but they are also lowering the growth trajectory of the economy,” Goldman Sachs CEO David Solomon said Tuesday during the company’s fourth quarter earnings call.
“CEOs and boards tell me they are cautious, particularly for the near-term,” Solomon said. “They are rethinking business opportunities and would like to see more stability before committing to longer term plans. Many firms have started preparing for tougher times focusing on factors within their control.”
Fed Chair Jerome Powell said last month that the central bank will probably continue to increase the federal funds rate early this year until signs emerge of a sustained decline in inflation. Policymakers are especially concerned about wages increases, prompted by an imbalance in the demand and supply of workers, he said.
“With persistently tight labor markets, wage pressures remained elevated,” the central bank said today, while noting that five of the 12 district banks said such “pressures had eased somewhat.”
Businesses “report difficulty in filling open positions,” the Fed said. “Many firms hesitate to lay off employees even as demand for their goods and services slowed and planned to reduce headcount through attrition if needed.”
Some retailers said inflation has prompted low- and moderate-income households to reduce spending, the Fed said.
Consumer spending, which accounts for nearly 70% of gross domestic product, fell last month even amid holiday gift-giving, the Commerce Department said. Outlays for furniture, autos, clothing and electronics slumped, along with spending at restaurants and bars.
Manufacturing output fell in December for the second straight month, registering the biggest monthly decline since February 2021, according to the Fed.
Former Treasury Secretary Larry Summers said Wednesday that inflation has improved more than he expected.
“We have seen some slowing of inflation indicators,” he said in a Bloomberg Television interview. “We need a substantial amount of disinflation that goes beyond volatile components receding, but you have to recognize that the figures are better than somebody like me would have expected three months ago.”
