Warning of Deepening Recession... Consumption Decreases by 1.1% Despite Inflation Slowdown (Comprehensive)

[Asia Economy New York=Special Correspondent Joselgina] As the inflation rate in the United States has eased, consumption, which accounts for two-thirds of the real economy, is freezing up. Even during the peak year-end shopping season, Americans are not opening their wallets, and December retail sales fell by the largest margin in a year. During the same period, wholesale prices slowed down, leading to the diagnosis that the impact of interest rate hikes by the central bank, the Federal Reserve (Fed), is fully affecting the real economy.

[Image source=Reuters Yonhap News]

◆ Wallets remain closed even at year-end... Is consumer sentiment freezing?

According to the U.S. Department of Commerce on the 18th (local time), retail sales in December last year decreased by 1.1% compared to the previous month. This is the largest decline in 12 months. It was a bigger drop than Bloomberg's expert forecast (-0.9%).

Usually, November to December is considered the peak year-end shopping season, but instead, U.S. retail sales showed a decline of over 1% for two consecutive months during this period. Holiday period sales also increased by only 5.3% compared to the same period last year, far below the expected 6-8%. Core retail sales in December, excluding gasoline and automobiles, decreased by 0.7% compared to the previous month.

Bob Michele, Chief Investment Officer at JP Morgan, pointed out, "The aggressive Fed tightening and quantitative tightening (QT) effects have started to strongly bite the economy." Jeffrey Roach, economist at LPL Financial, said, "U.S. consumers are becoming increasingly cautious in spending due to economic uncertainty," and "The possibility of a recession this year has increased." Consumption indicators, which account for two-thirds of the U.S. real economy, are evaluated as a measure to assess overall economic health.

By category, 10 out of 13 showed negative results. Department store retail sales fell by 6.6% compared to the previous month. Household and automobile sales, which usually surge in spending at year-end, decreased by 2.5% and 1.2%, respectively. Sales in the service sector, such as restaurants and bars, also dropped by 0.9%, confirming signs of overall consumption cooling. Experts do not rule out the possibility that the decline in December retail sales was partly due to falling commodity prices, but even considering this, they diagnose that recent consumption slowdown signals are intensifying.

Accordingly, there are forecasts that retail sales figures for the first quarter of this year could worsen further. David Petro Sileni, Chief Trader at InspireX, pointed out, "January retail sales data has become important."

◆ Growing recession warnings... Big tech layoffs continue

In particular, these consumption indicators have drawn attention as many economists have warned of a possible U.S. recession within the year. According to a recent survey conducted by the WSJ targeting U.S. economists, the average response regarding the likelihood of a recession within the next 12 months was 61%.

Industrial production data released on the same day also worsened more than expected, reinforcing these recession concerns. December industrial production fell by 0.7% compared to the previous month, underperforming the market forecast (-0.1%). Capacity utilization also stood at 78.8%, below the forecast (79.6%).

The Fed, through its Beige Book economic report released that day, stated that "little growth in the months ahead" is expected. The Beige Book, released before the Federal Open Market Committee (FOMC) regular meeting, is usually used as a key economic assessment material before interest rate decisions.

Additionally, a cold wave in employment centered on big tech continues, with Microsoft (MS) announcing layoffs of about 10,000 employees by March. Satya Nadella, MS CEO, officially announced on his blog that "we are in an era of significant change" and that 10,000 employees, accounting for 5% of the entire workforce, will be laid off. Amazon also began notifying employees of layoffs on the same day. As previously announced, the largest layoffs in its history, totaling 18,000 employees, have begun in earnest.

◆ Wholesale prices also slow down... Fed likely to take baby steps

Additional indicators suggesting that U.S. inflation is gradually easing have been released. According to the U.S. Department of Labor, the Producer Price Index (PPI) in December last year rose 6.2% compared to the same month the previous year. This is more than 1 percentage point lower than the previous month's increase (7.3%) and is the lowest level in the past nine months.

The December PPI, representing wholesale prices, also fell by 0.5% compared to the previous month, marking the largest decline since April 2020, the early stage of the pandemic. Following the slowdown in the December Consumer Price Index (CPI), the PPI also slowed, further supporting the so-called inflation peak theory. It is evaluated that the high-intensity tightening effects of the Fed, which declared war on inflation, are taking full effect. The Wall Street Journal (WSJ) stated, "Inflation remains historically high," but also noted that "signs of cooling are appearing due to decreased demand."

By item, energy prices fell sharply by 7.9%, and food prices dropped by 1.2%, leading the overall price decline. However, the service sector recorded a 0.1% increase, raising concerns that it could become a variable in the future. Major foreign media pointed out that energy prices have recently been rising compared to the beginning of the year, so this is also a part that needs to be closely watched.

As inflation concerns ease, the Fed is expected to further slow down at the Federal Open Market Committee (FOMC) meeting from January 31 to February 1. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds futures market reflects over a 93% probability of a baby step (a 0.25 percentage point increase in the benchmark interest rate) in February. The Fed's Beige Book also included content that inflation rates are slowing in most regions. However, the labor market overheating and wage pressure, which the Fed has been concerned about, remain high.

This content was produced with the assistance of AI translation services.