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Economic Commentary

Further slowing of economic activity as Fed rate hikes bite: Weekly Economic Review & Outlook

April 10, 2023
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March’s employment report showed a continued moderation in job growth, but the number of hires was still solid. Annual growth in average hourly earnings also slowed further, a positive sign of easing inflation pressures. These data should be pleasing to the Fed as labor demand cools broadly but hasn’t collapsed.

The ISM manufacturing and services surveys both fell, with manufacturing falling further into contraction and services nearing contraction. The new orders components in both surveys provide evidence of weakening economic demand, and the surveys are consistent with a slowing economy.

Key Takeaways:

What we learned last week: (pg. 1)

Job growth has slowed from January’s surge

While still solid, total job growth in March was the slowest in over two years.

Growth in services falls, but remains mildly expansionary

In contrast to manufacturing which has been contracting for months, the services sector is still expanding — but it is showing clear signs of weaker growth.

What we’re watching this week: (pg. 2)

April 12: Consumer Price Index

Inflation should slow further at the headline, but core remains sticky

Consumer prices remain in the center spotlight for consumers and the Fed. We expect to see glimpses of further disinflation with a weaker 0.2 percent increase for headline CPI in March with a year-on-year rate of 5.2 percent (down from 6.0 percent), led by further easing of energy and goods prices. However, core services prices likely remain elevated in March lifting the core CPI 0.4 percent higher on the month and boosting the year-on-year rate to 5.6 percent from 5.5 percent in February. The key will be the “super” core services inflation reading that excludes rental prices, which we expect to remain high and sticky. Eventually cooler wage gains should lessen the upward pressure on core services inflation, but it will be a gradual process.

April 14: Retail Sales

Retail sales fall as inflation weighs on consumer pockets

March’s retail sales report should show consumers pulled back further on retail purchases, as higher prices and slower personal income gains weigh on spending decisions. We expect a 0.3 percent decline in retail sales, which would be the fourth decline in the past five months. But given the surge in sales in January, the level of spending remains elevated. The reported slowdown in unit auto sales should slow headline sales. Moreover, consumer sentiment fell in March for the first time in four months after chaos ensued from the failure of several large banks, clouding households’ buying plans for big-ticket items.

April 14: Industrial Production

Production growth expected for March

The overall industrial production index likely increased a modest 0.2 percent on the month but was likely boosted by utility usage stemming from unseasonably cool weather across the country. However, we look for manufacturing production to sink a bit as the ISM manufacturing index continues to signal contraction in manufacturing activity.

Analysis: Job growth still solid

Nonfarm payroll growth continued to moderate in March, slowing to 236,000 — a still-solid number, but the weakest monthly growth since December 2020. The services sector accounted for all the private sector gain as goods-producing sectors contracted due to weakness in construction. Gains in services were led by leisure and hospitality, but even the 72,000 added jobs in that industry were well below the average from the prior six months (95,000). Government sector employment also jumped in March, boosting the headline figure.

The unemployment rate fell to 3.5 percent while the labor force participation rate rose to 67.6 percent, its highest level since February 2020. It was the fourth straight rise for the participation rate as more workers reenter the workforce, led by an encouraging climb of 0.2 percentage points in the participation rate among the working-age population (16-64) — a key step towards improved balance between the supply and demand for labor. Perhaps most importantly for the Fed, wage growth was slowed again in March as the year-on-year rate slowed to 4.2 percent from 4.6 percent in February.

March’s job market readings fit the theme of slowing, but not plunging, economic growth. This should keep the Fed on course for another smaller rate hike in early May — likely the last for this cycle — followed by a long pause in rate actions which likely lasts into 2024.

Analysis: Business activity weakens

The ISM manufacturing index tumbled further into contraction territory during March, falling to its lowest level since the Covid downturn. Recession conditions in the manufacturing sector were evident throughout the report as all component indices were in contraction, and the rate of decline in new orders — a leading indicator for the overall index — was the second-fastest of this cycle.

The ISM services index was also lower than expectations, falling to just above the expansion/contraction line at 51.2. All component indices fell, and the drop in new orders was the third-largest in series history (although it remained in expansion territory). In addition, the prices paid index declined by 6.1 points, the most in nearly six years, to a 32-month low of 59.5 as input costs ease.

These surveys are consistent with continued slowing of business sector activity. Eventually this is expected to result in much weaker hiring figures, especially when factoring in likely tightening of commercial loans by banks — helping to drive a moderate recession later this year.


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