By David Ashley, MD, MBA
In the last couple of weeks, we have had updates to the Producer Product Index, Consumer Price Index, and Retail Sales report. These reports are relevant to the likelihood of an impending recession.
The Consumer Price Index (CPI) measures the average change in prices of goods and services over time. The CPI has dropped from 6.1% to 5.0% annually. This is a sign that inflation is heading downward. The Federal Reserve (Fed) aims to maintain inflation at an average of 2%. Since so much of our economy is based on credit, some inflation is required to keep the economy growing. Inflation that persists at a decreasing rate, as it is now, is called disinflation. During a recession, spending goes down as people reign in their spending. When fewer people compete (demand) for the same number of goods (supply), prices tend to drop. CPI will fall in a recession as people decrease spending due to job concerns and the economy’s strength. Currently, CPI is likely decreasing due to the Fed having raised interest rates aggressively over the past year. As rates increase, credit becomes more expensive, increasing the price of anything a person has to borrow to purchase.
The Producer Price Index, or PPI, has also decreased. The PPI is a measure of the cost of commodities used to build the goods we purchase as consumers. When these prices go up, producers either have to absorb the increased costs, decreasing their profits, or pass them along to consumers by increasing the cost of the final good or product. If producers notice declining demand for their products, they will slow production, resulting in a decrease in demand for the commodities needed to build the product, causing the prices of those commodities to fall. When this occurs in multiple corporations simultaneously, the PPI will decrease as production, on average, decreases. The numbers released last week showed a PPI decrease of 0.5%. This is another indicator that inflation is heading downward. Like the CPI, the PPI will often decrease in a recession as spending for producers and consumers decreases.
Retail sales were down a full percentage point in March 2023 compared to February 2023. When adjusted for inflation, this is a significant number. This means that consumers purchased fewer goods in March. There are multiple reasons people might spend less money. If we are going into a recession, people might be spending less because they are worried about losing their jobs. This shows up in decreased credit card use, as well as decreased sales at corporations such as Walmart and Amazon. This could signal that we are at the beginning of an economic slowdown.
If 70% of consumers don’t have $500 set aside for emergency use, which appears to be the case, as most people carry debt month to month on their credit cards, then the consumer may have hit a wall with spending and borrowing. Inflation has forced people to put more money into the basics, food, and shelter, leaving less left over for the things that aren’t necessities. Another reason consumers might be spending less is that they can no longer increase their credit. The banks are becoming more cautious, loaning out less money and raising the standards required to borrow. If consumers are using credit to pay for necessities, and now the credit is not available or has been maxed out, this can lead to a depression or recession if these behaviors occur on a large scale.
We don’t always know the significance of a decreasing PPI, CPI, and Retail Sales. There can be several explanations for why any of these numbers are on the move. When all three of them are trending down simultaneously, along with the tightening of bank credit, this strengthens the case that the economy is slowing down and a recession is possible, maybe even likely, later this year.
Employment is also slowing down slightly, though the unemployment rate remains historically low. People who want jobs have them, but available jobs are decreasing, new unemployment claims are increasing, and more people are extending unemployment claims nationally, implying that laid-off workers are having more trouble finding new jobs. We hear a lot more about layoffs in the news lately. Bed Bath and Beyond and David’s Bridal filed for bankruptcy. This and the above information could indicate that the economy is slowing down.
Remember that one definition of a recession is two consecutive quarters of decreasing gross domestic product, or GDP. We have yet to meet that criterion. Stay tuned.