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Wall Street suffers one of its worst weeks in years as recession worries loom

Inflation is not cooling as quickly as hoped, while growth is slowing, leading many investors to take on a bearish gait heading into next week when the Federal Reserve is expected to hike interest rates again.

MANHATTAN (CN) — Wall Street saw its worst sell-off since June 2020 earlier this week, and with growth slowing and another interest rate hike almost assured, markets were unable to recover even a little of the lost value in equities.

The biggest plunge came on Tuesday, when the Dow fell 1,276 points, a 3.9% fall for the day, with the S&P 500 and Nasdaq losing 177 points and 632 points — declining 4.3% and 5.1% — respectively. By the week’s end, the Dow lost 1,330 points, the S&P shed 194 points, and the Nasdaq declined 664 points.

The rout started after the U.S. Bureau of Labor Statistics released its consumer price index, showing prices increased another 0.1% in August and 8.3% over the last year. Many investors had hoped dropping gasoline prices would help further ease inflation, but the CPI report showed inflation has been persistent in a few sectors.

On the heels of the inflation report came retail sales data on Thursday from the U.S. Census Bureau, which reported retail sales in August gained 0.3%, better than the 0.1% many analysts had predicted. Retail sales from July also were revised significantly lower, from the 0.8% initially reported to 0.4%, which further supports the theory that consumer demand is slowing.

Some were quick to point out the Census Bureau’s report excludes volatile items like vehicles, food service, and building supplies, while others note consumer spending does not paint a fulsome picture of overall spending.

“Looking at the report is a mixed picture and is likely to see [gross domestic product] growth expectations for the third quarter revised down a little,” wrote James Knightley, chief international economist at ING. “Nonetheless, we must remember that consumer spending isn’t just retail.”

Year-over-year, the retail numbers paint a strong picture of consumer spending. In total, consumers spent more than 10% last month compared with August 2021, with food services and drinking establishments seeing a whopping 18.5% increase over that period. However, with volumes now dropping those numbers are sure to taper off, even with inflation, and many believe spending already has been dropping.

“When this data is folded into personal consumption expenditures later this month by the Bureau of Economic Analysis, it will confirm what we already see in Morning Consult’s consumer spending data for August — very little growth in real spending,” said Scott Brave, leading consumer spending economist at the survey company.

The BLS also on Thursday released its producer price index, which noted that demand fell 0.1% in August. The drop was largely expected, and moderates the hot CPI report and mollifies those worried the Federal Reserve may go too far next week in hiking interest rates.

However, it also likely portends what many have been warning about: a recession in early 2023.

“We now expect a mild recession in [first half] 2023, with negative real GDP growth in [the first two quarters,” wrote analysts at Oxford Economics in an investor’s note Friday afternoon. “We continue to see inflation moderating in 2023, but at a slower pace than before, with the year-over-year change in the CPI not returning to the 2% target until 2024.”

Others in the business community are using the dreaded ‘r’ word now, too.

On Friday, before markets opened, FedEx told analysts that “macroeconomic trends significantly worsened later in the quarter, both internationally and in the U.S.,” and CEO Raj Subramaniam said during an interview on CNBC that he thinks a global recession is inevitable. “These numbers, they don’t portend very well,” he said of the slowdown of FedEx’s business.

The shipping company saw its shares lose nearly one-fourth of its value in early-morning trading, finishing the day down 21%.

Continuing its recent trend, consumer confidence inched up again slightly earlier this week. The preliminary University of Michigan consumer confidence index increased from 58.2 to 59.5, slightly below the expectation it would raise back to 60.

Perhaps more importantly, long-term inflation expectations fell to the lowest they have been since July 2021, while 12-month inflation expectations dropped for the third straight month. Business expectations also improved in the index, though uncertainty over long-run inflation picked up from 3.9 to 4.5 on the index.

“Consumers are showing amazing resiliency as buying conditions for major ticket items are better than the June lows but still look weak,” said Jeffrey Roach, chief economist at LPL Financial. “Falling gas prices should boost consumer spending in the near term, but tightening financial conditions create growing risks for next year.”

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