The manufacturing sector in the US has been under serious pressure for several months. Worryingly, this weakness now seems to be spreading outside of manufacturing. The probability of the US economy slipping back into recession in the near future has significantly increased in the past two months.
US manufacturing has been under serious pressure for several months, which is already being reflected in cutbacks in investment spending. Other key parts of the economy like the labour market and the housing market have been holding up rather well. Worryingly, in the past developments in manufacturing were usually leading indications for the rest of the economy.
In recent months business confidence in the services sector has also turned down sharply, which is obviously an important source of concern. For now, these indicators remain above recession-like levels. As such, the most likely scenario is still for the US economy to avoid recession. That said, the probability of the US slipping back into recession in the near future has significantly increased in the past few months.
In any case, the weaker economic data will force the Fed to scale back its rate hiking plans. Until quite recently, the Fed was planning to raise its policy rate by 1% over the course of the year. Markets have already abandoned any expectation of further rate hikes this year.