The US economy showed signs of slowing with retail sales and manufacturing dropping last month, but the labor market remained resilient as employers largely hold onto workers.
Retail sales fell in November by the most in nearly a year in a broad-based decline reflecting the strain of inflation and a shift toward spending on services. Several factory gauges showed contraction in data out Thursday, burdened by higher borrowing costs and weaker demand.
One bright spot continues to be the labor market, as initial applications for unemployment benefits fell last week to the lowest in two months. However, a separate measure of unemployed workers who’ve been out of a job for a longer period has climbed to the highest since February.
Taken together, the data point to a slowdown into the end of the year, which should be welcomed by Federal Reserve officials who are trying to lower growth in order to stamp out inflation. Policymakers forecast gross domestic product will barely expand this year and next, according to projections out Wednesday, intensifying recession concerns.
“Households are still tapping excess savings and benefiting from robust wage gains, but both tailwinds will wane next year, especially if the Fed keeps raising rates,” Sal Guatieri, senior economist at BMO Capital Markets, said in a note.
US Retail Sales Fall by Most in Nearly a Year
Fed Chair Jerome Powell said Wednesday the central bank still has a ways to go in hiking interest rates to a level it deems “sufficiently restrictive.” While inflation has slowed in recent months, Powell said the labor market remains far too tight and wage growth risks feeding into price pressures.
That’s been supportive of consumer spending — by far the largest contributor to economic growth. But the weak retail sales report “indicates that the Fed’s rate hikes are starting to bite,” according to Bloomberg Economics.
So-called control group sales — which are used to calculate gross domestic product and exclude food services, auto dealers, building materials stores and gasoline stations — fell 0.2%, missing estimates for a 0.1% gain.
While the November figure was disappointing, several economists noted the strong spending data from October, suggesting that consumers started their holiday shopping early this year as retailers extended deep discounts. Also, the report doesn’t capture much of services spending, where Americans have been shifting more of their dollars.
What’s less clear is how long that momentum can last, especially as Americans are increasingly tapping into savings and relying on credit cards.
“We are on alert for a sharp slowdown in the first quarter, as a softer labor market makes people less willing to run down savings accumulated during Covid to maintain elevated consumption,” Kieran Clancy, senior US economist at Pantheon Macroeconomics, said in a note.