US Business Activity Declines for Seventh Month in a Row as Recession Looms

A pedestrian carries a shopping bag while walking through Union Square in San Francisco, Calif., on Nov. 16, 2022. (Photo by Justin Sullivan/Getty Images)

Business activity in the United States contracted for the seventh consecutive month in January, with both manufacturing and service sectors remaining in the red for the month, suggesting a downturn in economic activity.

The S&P Flash U.S. PMI Composite Output Index for January came in at 46.6, up from 45 at the end of 2022, according to a news release on Jan. 24. Readings below 50 indicate contraction. Since July 2022, the Composite Output Index has remained below the 50 level. The January contraction was the slowest since October. Both goods and service providers recorded similar rates of decline. However, service companies indicated a “notable slowdown” in the pace of decline since December.

The S&P Global Flash U.S. Manufacturing PMI came in at 46.8 in January, up from 46.2 in December. This is the third consecutive month it has remained below 50. The S&P Global Flash U.S. Services Business Activity Index was at 46.6 in January, up from 44.7 in the previous month and the seventh straight month in contraction.

“The U.S. economy has started 2023 on a disappointingly soft note, with business activity contracting sharply again in January,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.

“Although moderating compared to December, the rate of decline is among the steepest seen since the global financial crisis [of 2008–09], reflecting falling activity across both manufacturing and services.”

Economic Downturn

Williamson pointed out that job growth has cooled down, with January seeing a “far weaker increase” in payroll numbers when compared to much of 2022. This reflects a “hesitancy” among businesses to expand capacity as they face “uncertain trading conditions” in the upcoming months.

The rate of order book losses moderated and business sentiment saw an “encouraging upturn.” However, the overall level of confidence among businesses continues to remain “subdued” when looking at historical standards.

Firms in the S&P survey were found to be concerned about how rising interest rates, high prices, labor shortages, and supply shortages would affect their business.

“The worry is that not only has the survey indicated a downturn in economic activity at the start of the year but the rate of input cost inflation has accelerated into the new year, linked in part to upward wage pressures, which could encourage a further aggressive tightening of Fed policy despite rising recession risks,” he said.

Business confidence, though at its highest level in four months, continued to remain below the historical series trend. Companies expressed hope that there would be a resurgence in consumer demand this year.

Slowdown Signals

In addition to the S&P report, other indicators have also been flashing red signals for the American economy. The Conference Board’s Leading Economic Index (LEI) for the United States fell by 1 percent in December, the tenth straight month of decline.

Between June 2022 and December 2022, the LEI declined by 4.2 percent, a bigger fall compared to the 1.9 percent decrease in the previous six months.

“The U.S. LEI fell sharply again in December—continuing to signal recession for the U.S. economy in the near term,” said Ataman Ozyildirim, senior director, economics, at The Conference Board.

“There was widespread weakness among leading indicators in December, indicating deteriorating conditions for labor markets, manufacturing, housing construction, and financial markets in the months ahead,” he stated.

Former Federal Reserve chair Alan Greenspan had warned earlier this month that a recession in the United States is the “most likely outcome.” Even if the Fed were to change its policy, it won’t be “substantial enough” to avoid at least a mild recession, he stated.

“Over the last 50-plus years, every time the U.S. Conference Board Leading Index turned negative for two or more consecutive months, on an average seven months later the economy is in a recession! This indicator is negative since Aug. 22,” Kirtan A. Shah, the founder of Credence Wealth Advisors, stated in a tweet on Jan. 20.