Economy Continues to Slow

Dan North | April 2023
Retail sales fell -1.0% m/m in March, worse than expectations of -0.5%. It was the fourth decline in five months. The y/y results were also startling, falling a full 3% from February’s 5.9% to 2.9%. The long-term y/y average growth for retail sales is twice that at 6.0%. March’s reading was the lowest of the post-pandemic era and just two months ago it was much higher at 7.6. This is a slowing economy.
By industry on a m/m basis, gasoline sales plummeted -5.5% m/m, mostly due to a sharp drop in prices. Even without the decline in gasoline sales, retail sales were down -0.6% on the month. On a y/y basis, gas led the way down again, falling a steep -14.2%. Electronics and appliances fell -10.3% on the year. On the positive side, restaurants and bars made a strong recovery with sales growing 13.0%, followed by e-commerce at 12.3%. 
Retail sales aren’t adjusted for inflation, but once inflation is stripped out, that 2.9% y/y growth turns to negative -2.0%. Consumers are buying fewer goods—but at higher prices.

Manufacturing industrial production fell -0.5% in March, and is now running at a -1.1% y/y rate

According to an article from Reuters, “A Conference of State Bank Supervisors survey found the lowest sentiment among community bankers since the poll began in 2019. Nearly all of the 330 respondents, some 94%, said a recession had already begun.”

The Federal Reserve released the minutes of its March meeting. Here are some quotes which show some vacillation on what it should do. It appeared that some meeting participants would have wanted to hike 50 bps before the problems developed in the banking sector. But some participants wanted to hold. The result was apparently a compromise of sorts at 25 bps. Here are some enlightening quotes.

“Some participants noted that given persistently high inflation and the strength of the recent economic data, they would have considered a 50 basis point increase in the target range to have been appropriate at this meeting in the absence of the recent developments in the banking sector. However, due to the potential for banking-sector developments to tighten financial conditions and to weigh on economic activity and inflation, they judged it prudent to increase the target range by a smaller increment at this meeting.”

“They (meeting participants) commented that recent developments in the banking sector were likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation.”

“Several participants noted that, in their policy deliberations, they considered whether it would be appropriate to hold the target range steady at this meeting.”

“Given their assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years. “


So let’s see if I get this right:

·         inflation is falling rapidly by most measures (see previous note)

·         economic activity is definitely slowing (see previous note)

·         there are still worries in the banking sector

·         credit is definitely going to tighten

·         community banks say we are already in a recession

·         you (the Fed) have raised rates aggressively, but those hikes are still a long way from having a full effect, and

·         your own staff projects a recession


That all seems to me to be a fairly good argument to not hike in May. But they are going to.

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