The stock market fell Friday after new data showing U.S. manufacturing activity has stalled and the service sector’s pandemic recovery has gone into reverse as a result of high inflation and mounting interest rate hikes, feeding concerns that the Federal Reserve’s efforts to cool decades-high price increases may force the economy into a recession.
The Dow Jones Industrial Average fell 138 points, or 0.4%, to close at 31,899, while the S&P 500 fell 0.9% and the tech-heavy Nasdaq 1.9%; for the week, the indexes ended up 2%, 2.5% and 3%, respectively.
Though roughly flat to start the day, stocks started sinking after S&P Global reported business activity has fallen “notably” in July, with its widely monitored Flash U.S. PMI Index posting the sharpest decline in output since May 2020 amid the pandemic recession, despite expectations for a slight gain.
In a statement, S&P Global chief business economist Chris Williamson said the unexpected contraction points to a “worrying deterioration” in the economy as inflation, higher interest rates and “growing gloom” about the economic outlook overcome the pent-up demand that helped fuel growth during the pandemic.
With companies’ expectations of future growth slumping to the lowest level since the early days of the pandemic, firms are starting to reassess their production and workforce needs, resulting in slower employment growth, Williamson adds.
S&P Global wasn’t alone in raising new concerns on Friday: Bank of America economist Michael Gapen wrote in a note to clients that gross domestic product likely shrank 1.5% last quarter as a result of a steeper-than-expected housing market decline and a sharp increase in business inventories (as consumer spending slows).
Gapen said the slew of economic data pushing sentiment down this week supports the bank’s projection that the U.S. will fall into a recession later this year, with inflation—which last month clocked in at 9.1%—likely taking at least another two years before falling in line with the Fed’s mandate of 2%.
When excluding the pandemic lockdown months, S&P Global’s survey data, collected from around 800 companies, showed output falling at a rate not seen since the global financial crisis in 2009.
Major stock indexes plunged into bear market territory last month ahead of the Fed’s latest policy decision, and growing fears of an impending recession have since ushered in waves of layoffs among recently booming companies. To make matters worse, the U.S. economy unexpectedly shrank 1.6% in the first quarter, its worst performance since the Covid recession. Meanwhile, a growing number of economists, including those at Bank of America, now forecast the economy shrank again in the second quarter, which would constitute a technical recession.
What To Watch For
The latest relief rally in stocks will surely be tested further next week. The Fed is expected to raise interest rates by 75 basis points for the second month in a row Wednesday, and the Bureau of Economic Analysis releases its estimate for second-quarter GDP growth on Thursday. Meanwhile, a slew of tech earnings start Tuesday, with Google and Microsoft slated to report in the afternoon.