Topline
Growing evidence emerged this week that the Federal Reserve’s interest rate hikes, which have already caused a sudden collapse in the formerly red-hot housing market, have fueled an unprecedented slowdown for manufacturers—setting the stage for what could lead to a prolonged downturn in industrial production.
Key Facts
Though the slowdown in the U.S. economy this year has been led by a downturn in the housing market, the pain “appears poised to spread into the manufacturing sector,” Bank of America economists led by Michael Gapen wrote in a Friday note, citing data this week showing manufacturing activity falling to some of the lowest levels since the Great Recession.
Earlier Friday, S&P Global economist Chris Williamson said factories are cutting production at a rate that “looks set to gain momentum in coming months,” as manufacturers—faced with “unprecedented build-ups of unsold stock”—seek to bring inventories down to more manageable levels.
Inflation, higher interest rates and growing recession fears have led to “slumping demand for goods in both the home-market and abroad,” says Williamson, adding that new export orders last month “fell especially sharply” in a sign of “one of the steepest deteriorations in global trade since 2009,” according to the JPMorgan Global Manufacturing Purchasing Managers’ Index.
In light of the weakness in exports, Bank of America downgraded its forecast for fourth-quarter gross domestic product growth to 1.2% from 1.4% a week prior, with the bank’s economists predicting the U.S. will ultimately fall into a recession next year.
One bright spot: Bank of America says its pessimism about the outlook for manufacturing doesn’t include automakers, which continue to face a semiconductor shortage that could encourage them to bolster production even if there’s a recession.
Nevertheless, the overall slowdown in manufacturing will “likely have a noticeable effect on economic activity and—perhaps—employment,” Gapen notes, noting automobiles and auto parts make up only 5% of industrial production.
As experts weigh whether the nation may plunge into a recession, here’s how the economy is holding up:
Housing Market
One of the hardest-hit pillars of the economy this year, the housing market has suffered from dwindling demand as the Fed’s interest rate hikes drive up the cost of homebuying. According to the National Association of Realtors on Wednesday, pending home sales, which measure purchasing contracts signed on previously owned and existing properties, fell 4.6% in October—notching a fifth-straight month of declines. Meanwhile, existing home sales have plunged 32% since January.
Job Market
Despite waves of layoffs hitting some of the world’s biggest employers, the job market continues to show signs of strength, at least according to the Labor Department. Total employment increased by 263,000 in November—significantly better than the 200,000 new jobs economists were expecting, according to data released Friday. “Today’s job market report does not scream recession,” David Donabedian, chief investment officer of CIBC Private Wealth US, said in emailed comments Friday—before warning “the job market will falter” as the economy heads into a recession next year. EY forecasts the unemployment rate will rise from 3.7% to 5.5% by the end of next year, indicating the economy could lose as many as 3 million jobs.
The Fed
In a detailed summary of its early November meeting, the Fed revealed “a substantial majority” of officials believe a slowing in the pace of rate hikes will “likely soon be appropriate” as the economy shows signs of cooling, setting the stage for a half-point increase this month. Doubling down on Wednesday, Powell said, “The time for moderating the pace of rate increases may come as soon as the December meeting.” After the strong jobs data, any signs inflation is still hotter than expected could cast doubt on the Fed’s slowdown.
Stock Market
Stocks have rallied since late September but are still facing steep double-digit percentage losses. The S&P 500 is down 15% this year, while the tech-heavy Nasdaq has plunged 28%. In a Thursday note, JPMorgan analysts led by Dubravko Lakos-Bujas predicted the S&P will “re-test this year’s lows” in the first half of 2023, implying another 14% decline. The bank cited a “proverbial snowball” of high borrowing costs, a deterioration in consumer savings and a rise in unemployment will contribute to the market’s poor performance.
