The economy is slowing down. Is The Recession Already Here?

Buyers are buying less and factories are making less – in other words, the economy is slowing and even a .

Reports on Wednesday showed signs of a slowdown on two fronts. Retail sales fell 1.1% in December as consumers cut spending in 10 of 13 major categories tracked by the Census Bureau. Businesses also hit the brakes, with US manufacturing output falling 1.3% in December, the Federal Reserve said. Both were the second straight month of slowdowns.

The fall in retail sales is especially scary because if both consumers and businesses continue to shrink, the economy could slow to the point of a recession. When people reduce their spending, companies reduce the number of workers who produce the good or service that is not sold. An interest rate hike by the Federal Reserve could make debt too expensive, sending the economy into recession. If that happens, economists say, the current job market, which has so far been a bright spot for workers, could take a turn for the worse.

Taken together, the day's data “reinforces the message that a recession is on its way, and we may actually be in it.” James Knightley, chief economist of the United States at ING, said in his comment. “Companies will adopt increasingly defensive strategies, so strong jobs—currently almost the only decent set of numbers—can't survive in this environment.”

is partially responsible for the delay. Since 2021, the prices of products and services have increased rapidly. Despite price increases, consumers have maintained their spending habits. But they may not be able to continue.

Not only that, but household finances have been caught in the Federal Reserve's crossfire. The central bank raised its benchmark interest rate in a move that boosted costs for consumer loans and car loans.

“American consumers are still tightening their belts amid high inflation, rising borrowing costs and shrinking wealth,” Sal Quatieri, chief economist at BMO Capital Markets, said in a statement.

Businesses are also tightening their belts and cutting production on a wide range of products from cars to computers to clothes, according to the Fed's industrial production data, a sign that they are bracing for lower demand for their goods.

“It is clear that the manufacturing sector is already in recession,” economists at Wells Fargo Securities said in a note.

The Fed rate hike and subsequent economic slowdown had the expected effect. There is inflation according to consumer price data. Not only that, the Bureau of Labor Statistics reported that the producer price index, which measures wholesale prices, fell 0.5%, which could lead to lower prices on store shelves.

Taken together, the data reinforced warning signs of a recession sometime this year, which could mean layoffs, lower living standards and depleted savings for many. Major stock indexes fell on Wednesday as markets digested the news, with the S&P 500 down more than 1% in the afternoon.

“Investors are beginning to understand that a recession is coming,” Edward Moya, chief market analyst at OANDA, said in a comment. “The economy is clearly in slowdown mode.”

Economists say growing signs of cooling prices and a slowing economy are likely to encourage the Fed to slow anti-inflationary rate hikes. 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.

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