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First stumble of 2023 invites review of recessionary data

After two weeks of positive gains to kick off January, markets suffered their first real loss of the new year as more companies announce layoffs.

MANHATTAN (CN) — While most investors expect a recession to hit the U.S. economy sometime in the first half of this year, retail data and layoff announcements caused Wall Street to turn bearish after two weeks of straight gains.

The Dow Jones Industrial Average managed to pick up some steam on Friday, but overall the index fell 928 points since last Friday on the shortened week of trading. In contrast, though, the S&P 500 fell just 27 points for the week, while the Nasdaq managed to pick up 61 points since last Friday’s close.

A raft of bad data earlier this week had battered Wall Street, which has been preparing for an oncoming recession.

On Wednesday, the U.S. Bureau of Labor Statistics reported its producer price index declined half a percentage point last month, far more than the 0.1% predicted by most economists. In particular, the demand for services has fallen back to year-over-year levels not seen since Many 2021.

On the plus side, the PPI report indicates inflation is falling quickly, perhaps more quickly than anticipated. But it also suggests the economy may be shrinking quicker than anticipated. Several industries saw bigger declines than others: Mining fell 0.9% in December, while manufacturing plummeted 1.3% after already dropping 1.1% in November.

“The data continue to confirm sharp declines in inflation. The question is whether the economy can weather the sharp increase in rates to tackle inflation,” said Jamie Cox, managing partner at Harris Financial Group, noting that the “cost” in bringing down prices has yet to be fully felt. “At a minimum, there will be a profits recession, and that will keep stocks in check until that plays out.”

The same day as the PPI report, retail sales posted by the U.S. Census Bureau showed consumers pared back their spending in December. Nominal sales fell by 1.1%, with gasoline station sales, retail at department stores, and furniture seeing large drops. Grocery sales were among the few items that actually ticked up.

On Friday, the National Association of Realtors reported that existing-home sales fell 1.5% last month and are now down more than one-third from a year ago, the slowest such sales have been in more than a decade. “December was another difficult month for buyers, who continue to face limited inventory and high mortgage rates,” NAR Chief Economist Lawrence Yun said in a statement. “However, expect sales to pick up again soon since mortgage rates have markedly declined after peaking late last year.”

Worse than the various data reports were announcements by several companies of major layoff plans on the horizon. The parent company for Google announced Friday it planned to cut 12,000 jobs later this year, following similar announcements by Microsoft and Amazon earlier this week, which plan to cut 11,000 employees and 18,000 employees, respectively.

Last week, Goldman Sachs stated in its earnings release that it planned to cut 3,200 jobs, its largest mass-layoff since 2008. And it is likely, given notes by many firms in recent earnings reports, that other banking institutions will follow suit.

Coupled with this week’s poor retail and pricing data, the layoffs indicate to some experts that the recession could already be here.

“Remember, jobs are always the last thing to turn in a cycle given labor data is such a lagging indicator,” wrote James Knightley, chief international economist at ING, in an investor’s note. “More bad news will be coming in the months ahead with the Federal Reserve likely to reverse its rate hikes from late third quarter 2023 onwards.”

In a speech on Thursday, Fed Vice Chair Lael Brainard spooked investors with comments that the central bank would “stay the course” in fighting inflation despite the PPI and retail sales reports indicating subdued growth this year.

“The drag on U.S. growth and employment from monetary policy is likely to increase in 2023 because transmission lags from the rapid, large swing from accommodation to restraint in 2022,” Brainard told an University of Chicago audience on Thursday, adding that further shocks to the economy due to the war in Ukraine and the pandemic could change the Fed’s plans.

While “it is likely that the full effect on demand, employment, and inflation of the cumulative tightening that is in the pipeline still lies ahead,” Brainard said, “even with the recent moderation, inflation remains high, and policy will need to be sufficiently restrictive for some time.”

Fed Governor Christopher Waller also suggested Friday that inflation could still be a headline in 2023, noting that while higher inflation was “less concentrated” by the end of last year “I am still cautious about the inflation outlook and supportive of continued monetary policy tightening.”

The Fed will meet at the end of the month to determine if another increase to the federal funds rate is warranted. Experts virtually guarantee the central bank will vote for an increase, though it may be less than those from meetings in 2022.

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