The U.S. Economy Is Slowing Down. Is A Recession Looming?

Retail sales and industrial production have fallen more than expected. With a recession looming, silver could soar if the Fed stops raising rates.

The latest economic data leaves no doubt that the U.S. economy is losing momentum.

Retail sales fell 1.1% in December, following a downwardly revised 1% drop in November. The decline was larger than expected, and it was the largest decline in 12 months. This decline is undoubtedly a cause for serious concern as we are talking about the holiday shopping period. However, sales declined in part because of lower prices.

Industrial production also had a negative surprise, falling 0.7% in December. This followed a 0.6% decline in November and was larger than expected. The decline was mainly due to manufacturing production, which fell 1.3% in December and declined 2.5% year-over-year in the fourth quarter. Higher interest rates and lower purchasing power due to inflation have negatively impacted the demand for goods.

The latest release of the Beige Book is also not encouraging. According to the report, five Fed districts reported little to moderate growth in overall economic activity over the past few weeks, while six districts reported no change or a slight decline from the previous reporting period and one reported a significant decline.

Disinflationary pressures and widespread signs of weakening demand could encourage the Fed to slow the pace of interest rate increases further. That's what Patrick Harker, president of the Philadelphia Fed, suggested this week, saying he was "prepared for the U.S. central bank to move to a slower pace of interest rate increases amid some signs of cooling hot inflation."

If you're taking a trip and you encounter foggy weather or a dangerous highway, it's a good idea to slow down. Likewise, if you are engaged in policymaking in today's challenging economic and financial environment. That's why many supported (the Fed's) decision last month to lower the pace of rate hikes. And the same considerations allow for an even slower pace at the upcoming meeting.

XAU/USD daily chart
What does all this mean for the outlook for silver (and gold) in 2023? Lower inflation and weakening economic momentum mean the Fed could become less aggressive in raising interest rates. Any signs of looser monetary policy should be positive for silver and support the uptrend that began in November 2022 (see chart below, courtesy of silverpriceforecast.com). Moreover, as the U.S. economy loses momentum, fears of a recession should intensify, which could also strengthen demand for precious metals as safe-haven assets.

XAG/USD daily chart
Ironically, the price of silver fell yesterday. But it could be a normal correction (don't forget that silver is partly an industrial metal) or a reaction to hawkish comments from Bullard and Mester at the Fed about the need to raise the Fed Funds rate above 5%. But these two hawks are not voting members this year. So ignore the market noise and focus on the fundamental trends. And they are obvious: The economy is slowing, which will prompt the Fed to slow down and later stop raising rates altogether.

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