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Federal Reserve forecasters warn of a possible recession later this year

MILES PARKS, HOST:

We got some good economic news this week. Inflation eased last month. Even the price of eggs is coming down. But as they say, do not count your chickens before they hatch. Not all of the economic news is so encouraging. Retail sales are down, and more people are applying for unemployment benefits. So is the country headed to recession? That's the question that we bring to NPR's Scott Horsley, who's going to help us sort through all of this. Hey, Scott.

SCOTT HORSLEY, BYLINE: Good morning.

PARKS: Good morning. So we know that one of the biggest engines for the U.S. economy is consumer spending, people spending their money. Is that engine starting to sputter?

HORSLEY: Maybe just a bit. Retail sales were down in March. For the second month in a row, people spent less money on cars and furniture and appliances. Grocery sales were flat even though grocery prices actually came down last month for the first time in 2.5 years. You mentioned that big drop in egg prices - down almost 11% last month. Tom Charley runs a chain of grocery stores in the Pittsburgh area. He says a lot of people cut back on eggs earlier this year when the price topped $5 a dozen.

TOM CHARLEY: They might not be telling you to your face that, hey, your prices are too high. But they are definitely making statements with their buying behavior.

HORSLEY: Now, egg production is bouncing back after a lot of the laying hens were wiped out earlier in the year by avian flu. Prices are coming back to Earth, and Charlie says egg sales are pretty much back to normal.

PARKS: I'm sure a lot of listeners are thrilled to hear that grocery prices are down a little bit. But what's happening with inflation more broadly?

HORSLEY: It is easing. Overall, prices in March were up 5% from a year ago. That's the smallest annual increase in almost two years. And certainly, it's a big improvement from last summer when inflation was topping 9%. But Chris Waller, who sits on the Federal Reserve's Board of Governors, says a lot of that big price swing in both directions comes down to gas and groceries.

CHRIS WALLER: A lot of that run-up and run-down is just food and energy, particularly energy. So it's not really telling you what's going on underneath for kind of all the other goods and services. Core inflation has just literally gone like this - sideways. We need to get that down to get closer to our 2% target.

HORSLEY: Core inflation strips out those food and energy prices, which tend to bounce around a lot, and focuses on more persistent price changes. In particular, the Fed's watching the price of services like restaurant meals and haircuts. And service inflation remains stubbornly high. That's why the Fed is expected to raise interest rates again next month. But that could be the last rate hike we see for a while.

You know, ever since the collapse of Silicon Valley and Signature banks last month, other banks have been cutting back on lending. Waller says that works like an additional rate hike, slowing down the economy and doing some of the Fed's inflation fighting work for it.

PARKS: OK. So I think the question that I have asked you multiple times over the last year - and I'm going to ask you again. What are the chances that the U.S. economy doesn't just slow down but actually heads into recession this time?

HORSLEY: Yeah, a lot of people are worried about that. And some forecasters think the odds of a recession have gone up because of that drop in bank lending. The Fed's own staff now predicts a mild recession starting later this year with a recovery then coming in 2024 and '25. Most Fed policymakers, though, are not that gloomy, at least in public. Mary Daly heads the Federal Reserve Bank of San Francisco.

MARY DALY: We need to slow the economy to get things back into balance. But slowing the economy when we're on such a fast pace doesn't mean recession. It means slowing the economy back to a more sustainable pace. It's going to feel different than it did last year. But my outlook is we don't have a recession, but we do have a substantial slowdown.

HORSLEY: Some sectors are already feeling that. Manufacturing output was down last month. Of course, the housing market's taken a hit. On the plus side, though, we're still adding a lot of jobs every month, and the unemployment rate is still near a half-century low. So stay tuned.

PARKS: NPR's Scott Horsley, thanks so much.

HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.

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Miles Parks is a reporter on NPR's Washington Desk. He covers voting and elections, and also reports on breaking news.
Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.
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