Activity data take a turn for the worse

The weakness of retail sales and manufacturing output over the final two months of 2022 has reignited market fears of a hard landing this week, with the Fed’s latest Beige Book acknowledging that activity appears to have ground to a halt. Admittedly, the labour market still appears to be in good health – with jobless claims falling back below 200,000 last week. But we suspect that low claims figure is more a reflection of labour hoarding, with firms adjusting to weaker demand by aggressively slashing the weekly hours that employees work instead. The outcome will be the same – downward pressure on income growth and, with the saving rate already unusually low, consumption too. We continue to expect the economy to fall into a mild recession in the first half of this year.