In normal times, determining the direction of the U.S. economy through the interpretation of economic indicators is straightforward. However, soaring inflation, rising interest rates, and increased ambiguity in the economy right now make it harder to interpret the details of the economic data.

Economists typically consider a wide array of economic data when making projections about the economy’s health. Several popular indicators can determine the direction of the economy, such as employment, job vacancies, and retail sales. Still, interpretation of the data can vary, making it hard to project the economy’s direction.

Fed Chair Powell has cited the number of job openings in the U.S. as a closely watched measure of tightness in the labor market. The recent rise in job vacancies to a record high has been emblematic of the struggles businesses have had in attracting and retaining employees. If job vacancies fall, that can be viewed as greater success in filling open positions. However, it could also indicate employers are taking down job listings, a sign of cooling labor demand.

Interpreting retail sales data has recently become much more difficult amid shifting consumer preferences. Also, retail sales data is not adjusted for inflation, which makes it more difficult to assess underlying consumer demand. Slowing or declining retail sales may mean that consumers are spending more of their income on services. However, it could also indicate a slowdown in personal consumption, the main driver of the U.S. economy.

Nonfarm payrolls have been growing by hundreds of thousands each nearly every month since May 2020. The pace of growth, while still extremely robust at nearly 400,000 last month, has begun to moderate. On the positive side, the moderation of employment growth could be a sign of the shrinking of the U.S. labor pool, a classic sign of a tight job market. However, a slowdown in payroll growth can also show that employers are hiring fewer employees because they are experiencing or anticipating a slowdown in demand. It can also reflect more layoffs.

The difficulty in interpreting economic indicators makes it hard to get a definitive handle on the risks of recession. The sharp rise in interest rates has definitely increased the risks of a recession. Until consumers start to panic and sharply cut back spending, however, the risks of a recession still seem to be modest.

Source: Bar Chart