New Signs of Weakening Economy Heighten Concerns About High Interest Rates
![New Signs of Weakening Economy Heighten Concerns About High Interest Rates New Signs of Weakening Economy Heighten Concerns About High Interest Rates](https://i1.wp.com/www.investopedia.com/thmb/isJqqEYpGFF0btvocn2vnLCE5qY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-2159049546-343186680f354b87ac4aecd031e5052d.jpg?w=780&resize=780,470&ssl=1)
Key Takeaways
- A trio of economic reports Thursday came in below expectations, raising the prospect that high interest rates are seriously slowing the economy.
- Manufacturing activity was lower than expected, construction spending was lower, and more people filed unemployment claims.
- The increasingly gloomy outlook raised the possibility that the Federal Reserve would lower its benchmark interest rate in the months ahead at a faster pace than previously anticipated.
A raft of worse-than-expected economic data Thursday raised questions about how long the economy will be able to keep its head above water as high interest rates drag down vulnerable industries.
Three separate reports delivered downbeat surprises. Construction spending fell in June for the second month in a row, dropping 0.3%, the Census Bureau said. Forecasters had expected a 0.2% increase instead, according to a survey of economists by Dow Jones Newswires and the Wall Street Journal.
The manufacturing sector is struggling too, according to an index released by the Institute of Supply Management, which showed manufacturing activity declining for a fourth month in a row in July, the 20th decline in the last 21 months. The index dropped to a reading of 46.8%, down from 48.5% in June and below the 50% mark that separates expansion from contraction. Forecasters had expected an uptick to 48.9% rather than the deepening slump.
Industry struggles may be affecting workers too: 249,000 people filed for unemployment for the first time, the most since last August, the Department of Labor said. Economists typically take that report with a grain of salt, since the numbers tend to bounce around a lot from week to week.
Does That Mean We’re Headed Toward a Recession?
Taken together, the data was enough to raise concerns among investors that the economy could be more at risk of a downturn than previously thought. Major U.S. stock indexes fell sharply, in part because of concerns about the additional signs of a slowing economy. Friday’s monthly jobs report will provide another critical indication of the economy’s health.
Up to this point, the U.S. has avoided a long-predicted recession as the economy has stayed resilient despite the Federal Reserve’s campaign of anti-inflation interest rate hikes that are meant to slow it down. The unemployment rate is low by historic standards despite a recent uptick, and overall economic growth, as measured by the Gross Domestic Product, has run at a healthy clip.
The Fed has maintained its benchmark interest rate at its highest since 2001 for more than a year, pushing up borrowing costs on mortgages, car loans, and all kinds of other credit, to discourage borrowing and spending and allow supply and demand to rebalance. Inflation has come down significantly since its recent peak in mid-2022, but it’s come at a cost.
“The economy is in pretty good shape in 2024, but it does have weak spots. High interest rates are a major headwind for industries that use a lot of credit, like manufacturing, property development, and retailers of big-ticket items like furniture and cars,” Bill Adams, chief economist for Comerica Bank, wrote in a commentary.
One of the softer weak spots has been the housing market, which has been all but paralyzed by high mortgage rates driving buyers out of the market. With 2023 marking the worst year for home sales in nearly 30 years, the slowdown may be spilling over into other areas, especially manufacturing.
“The U.S. economy’s manufacturing base appears to be capitulating to the sustained combination of high interest rates, weak homebuying, and consumers’ price tag fatigue,” Gus Faucher, chief economist at PNC wrote in a commentary.
What About Rate Cuts?
If the grim numbers have a bright side for borrowers and investors, it’s that the Fed may respond by lowering those high interest rates faster than previously thought.
The Fed was already widely expected to cut its benchmark interest rate as soon as its next meeting in September. In the wake of Thursday’s data, the odds grew that the central bank would follow that up with more rate cuts at a faster pace, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data.
Treasury yields, which are sensitive to expectations around interest rates, moved sharply lower Thursday, after falling on Wednesday following Fed Chair Jerome Powell’s comments about the prospects for monetary easing as soon as September. The yield on the 10-year Treasury dropped below 4% on Thursday for the first time since February.
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