A Slowing Economy: The Evidence

A Slowing Economy: The Evidence

February 26, 2025 Catherine Williams - Chief Editor Business

Economic Slowdown: Markets React to Slipping Consumer Confidence and Inflation

Table of Contents

Equity markets took a significant hit this week, with much of the damage occurring on Friday, February 21. Losses accelerated into the close as traders suddenly realized the economy has been slowing. This realization was driven by a sharp fall in consumer confidence, a nearly 5 percent decline from the University of Michigan’s monthly survey, falling retail sales, a decline in new and existing home sales, and an inflation outlook that has unexpectedly turned up.

As seen in the table below, equity markets have now fallen in three of the last four weeks. While all but the Russell 2000 remain easily within striking distance of their recent peaks, the market’s mood looks to have shifted, especially after several recent economic reports disappointed.

The Magnificent 7 fared no better this past week with six of the seven giving ground (and five of those six giving significant ground). Only Apple ended the week higher. Year to date, only Meta is up significantly (and it gave back more than -7% this week). The big loser for the year among these seven is Tesla.

Slowing Economy

The economy is in deceleration mode, and it isn’t a new phenomenon, just one that has recently been recognized. In Q4, GDP only grew at a +2.3% annual rate. That compares unfavorably to +3.1% in last year’s Q3, and +3.0% in Q2.

Retail sales, always a reliable indicator, fell nearly -1% (-0.9%) in January. Some blame this on the weather. But online sales, which always go up during periods of bad weather, fell -1.9% in January, its worst showing since July 2021. It appears that post-hurricane rebuild and repair spending has passed. In addition, seasonally adjusted spending on furniture, appliances and autos is falling and apparel (clothing) sales, another reliable sign of consumer confidence, fell -1.2% in January from December levels. There was no saving grace in the retail sales report as shown below:

Total Retail Sales : ………………….…. -0.9% M/M January

  • Ex-car: ……………………. -0.4%
  • Ex-auto, gasoline: ……….. -0.4%
  • Ex-auto, gas, bldg. materials: -0.8% (consensus was +0.3%)

In addition, a recent report by the National Federation of Independent Businesses (NFIB) indicated that small businesses are seeing slower sales. Add to this the recent Walmart projection of slowing sales growth in the upcoming year (only 3%-4%). And now we have significant layoffs of Federal workers which will negatively impact the upcoming employment reports.

Inflation

As we’ve written in past blogs, the CPI is hamstrung by having a large weight (35%) in rents. The data used by BLS for those rents is lagged by nearly a year. Currently, vacancy rates are rising and the number of new apartment units coming on to the market is at a 40-year high. The recent run-up in rental rates looks to be in the rear-view mirror. And suddenly, with credit card debt outstanding having risen to record levels, the rising delinquency rates (and even in the mortgage arena) is finally getting some attention. As a result, we wouldn’t be surprised to see a bit of deflation by Q3.

And worse, Consumer Confidence has started to wane.

Employment

Recently, the Bureau of Labor Statistics released its Quarterly Census of Employment and Wages (QCEW). While the data is a bit stale, it shows a 34% discrepancy when compared to Non-Farm Payroll data (the monthly employment numbers). Through September of 2024, QCEW shows that the economy created 1.3 million jobs. On the other hand, the monthly Non-Farm Payroll reports through last September showed 1.98 million net new jobs. That’s a discrepancy of 680,000 jobs (an overstatement of 75,000 jobs per month). So, it appears that the labor market isn’t as robust as the monthly Non-Farm Payroll data would lead one to believe.

Housing

Existing Home Sales fell -4.9% in January from December levels, but were +2.0% higher than January a year ago. And while the median price advanced +4.8% year/year (to $396,900), the good news is that it fell -1.7% from December levels and is now flat or down for seven months in a row!

Sales by region (January):

  • West: -7.4% (LA fires?)
  • Northeast: -5.7%
  • South: -6.2%
  • Midwest: 0.0%

On a year/year basis, sales rose 2%, but new listings were up +17%. Not a wonder, then, as to why prices have been soft. As shown on the chart below, New Home Sales are stuck in a sideways rut, while Existing Home Sales have been sagging for the last couple of years (mainly due to high interest rates).

Industrial Production

Industrial Production has flatlined over the past couple of years, finally showing some life in January. But it remains to be seen if such a rise is permanent. While Industrial Production is not as important as it was 30 years ago, it still plays a significant role in economic activity.

Leading Indicators

The Conference Board’s Leading Economic Indicators (LEI) fell again in January (-0.3%) and over the six-month period (July to January) are down -0.9%. The LEI has been signaling economic slowdown for three years, and it hasn’t occurred. As a result, this index no longer has much credence among economists and forecasters. Our view is that the outsized federal budget deficits kept the economy afloat, and now that the Trump Administration and Congress have become a little more stingy, this index is likely to regain some of its former stature.

As for interest rates, markets are waiting on the Fed. So far, the Fed has indicated “higher for longer,” and until that attitude changes, interest rates will remain around their current levels. As noted above, we see a slowing economy, but until the Fed sees lower year/year inflation numbers, interest rates will stay elevated. Currently, markets don’t see a rate cut until late in the year. We think it will be sooner, but a rate cut clearly isn’t imminent.

Final Thoughts

  • Financial markets, especially the equity market, appear to have caught wind that the economy is slowing. Late this past week, equities fell hard when Walmart’s retail sales forecast disappointed Wall Street (apparently 3%-4% growth isn’t good enough).
  • There are several indicators of a slowing economy. The most prominent is Retail Sales which fell nearly -1% (seasonally adjusted) in January. In addition, recent employment data from the Bureau of Labor Statistics (QCEW) has thrown cold water on the monthly Non-Farm Payroll (NFP) reports. Turns out that NFP data overstated jobs by 680K over the first nine months of 2024!
  • Housing is also weakening. New Home Sales are trending sideways, while Existing Home Sales continue at low levels.
  • Industrial Production has flatlined for two years. It finally showed some life in January. Whether it can stay at a 2% growth rate remains to be seen.
  • Leading Indicators (LEI) continue to forecast a slowing economy. They’ve been doing so since mid-2022, so they have lost some credibility. Our view is that the outsized federal budget deficits kept the economy afloat. As (if?) those disappear, LEI will become prescient once again.
  • Our view on interest rates is that they are too high, slowing housing and private sector businesses. But, until the year/year inflation numbers come down, interest rates will stay elevated – and that’s according to several Fed governors.

Joshua Barone and Eugene Hoover contributed to this blog.

ECO SM: A Complete Q&A on Economic Slowdown and Market Reaction

What is an economic Slowdown?

Question:

What is an economic slowdown, and what are its primary causes?

Answer:

An economic slowdown refers to a decline in the growth rate of a nation’s GDP. It can be triggered by various factors such as inflation, decreased consumer confidence, and unfavorable economic data. This deceleration signifies a period where economic activity is less robust than in previous periods.

Reference:

How Do Economic Slowdowns Affect Equity Markets?

Question:

How do economic slowdowns impact equity markets, and what recent trends have been observed?

Answer:

Equity markets are sensitive to economic slowdowns. A significant recent trend showed markets reacting adversely to indications of a slowing economy, as evidenced by declining consumer confidence and increasing inflation outlook. Such factors resulted in equity markets falling in three of the last four weeks, primarily impacting indices like the russell 2000.

Reference:

  • The article details how equity markets responded to slipping consumer confidence and economic indicators.

What are Key Economic Indicators of an Economic Slowdown?

Question:

What are some reliable economic indicators that suggest an economic slowdown?

Answer:

Key indicators include:

  • Retail Sales: A nearly 1% drop in January suggests decreasing consumer spending.
  • Consumer Confidence: A sharp decline,highlighted by a fall from the University of Michigan’s monthly survey.
  • GDP growth Rate: Falling from 3.0% in Q2 and 3.1% in Q3 to 2.3% in Q4 indicates deceleration.
  • Employment Data: Discrepancies in job creation figures between the QCEW and Non-Farm Payroll data hint at a less robust labor market.
  • Housing market: Declining home sales and stable home prices reflect weakening housing demand.
  • Industrial Production: Flat performance over the years possibly signals stagnation.

reference:

  • the article outlines critical economic indicators such as retail sales, consumer confidence, and housing data.

Why Is the Current Inflation Outlook Concerning?

Question:

Why is the current inflation outlook considered concerning during an economic slowdown?

Answer:

The inflation outlook is concerning because customary indicators like the CPI are affected by significant variables such as rents, which can lag. Rising vacancy rates and increased new apartment units suggest that inflationary pressures might ease, but rising consumer debt and delinquency rates indicate potential economic stress.

Reference:

  • Insights are derived from the discussion on inflation in the article, focusing on CPI constraints and delinquency rates.

What is the Federal Reserve’s Stance on Interest Rates amid an Economic Slowdown?

Question:

What has been the Federal reserve’s stance on interest rates in response to economic slowdown signs?

Answer:

The Federal Reserve has indicated a “higher for longer” approach to interest rates, planning to maintain elevated levels until inflation declines. This stance suggests that despite a slowing economy, interest rates may not decrease until sustained year-over-year inflation reductions are observed.

Reference:

  • The article provides a discussion on the Federal Reserve’s expectations on interest rates.

What Long-term Effects Could an Economic Slowdown Have on Small and Large Businesses?

Question:

What are the long-term effects of an economic slowdown on small and large businesses?

Answer:

  • small businesses: Reports indicate slower sales, leading to reduced growth potential and scaling challenges, possibly affecting employment levels.
  • Large Corporations: Large companies like Walmart anticipate slower growth, impacting overall business strategies. Significant market players, such as the “Magnificent Seven,” see varied impacts—some experiencing declines, like Tesla.

Reference:

  • Referencing the article, economic slowdown effects include slower small business sales and projections affecting large businesses.

Final Thoughts on Economic Slowdown and Market Reaction

Summary:

The current economic slowdown is marked by falling equity markets, declining consumer confidence, and cautious projections for retail growth and employment. Even though inflation may ease, high interest rates could continue to suppress housing markets and private sector activity.Economic indicators like the LEI provide mixed signals, reflecting previous inefficiencies but potentially regaining credibility as government budget deficits shrink.

Expert Contributions:

This analysis is informed by insights from joshua Barone and Eugene Hoover, integrating comprehensive market observations with broader economic trends.

References:

This Q&A synthesizes authoritative perspectives and cross-referenced insights, offering timeless relevance and actionable understanding for readers examining economic slowdown phenomena.

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