Data out last week — admittedly looking in the rearview mirror — showed the economy exhibiting decent forward momentum, but there are signs that momentum is slowing.

In this month's forecast update, issued April 6, we revised up our forecast for first-quarter GDP growth to +1.9% (annualized), from last month's -0.4%. However, concerns over the potential tightening of financial conditions from a pull-back in bank lending led us to mark down growth over the remainder of the year, on average, by 0.3 percentage point.

Recession risks continue to loom. Recognizing the difficulty of pegging the timing of a downturn with much precision, we are instead showing growth that is below the economy's potential for the next couple of years and a gradual rise in the unemployment rate from 3.5% to 4.6% by early 2025. There is rough sledding ahead; we just can't say for sure where the bumps and valleys are.

While employment gains in March on both the establishment and household surveys were healthy, aggregate hours worked fell for the second month in row, albeit from a level that soared in January. This decline was driven by the second consecutive drop in the average workweek. It's not uncommon for employers to trim hours before cutting workers.

In conjunction with a recent gradual rise in jobless claims, a rising trend in announced job cuts, and a declining trend in the job openings rate, this month's employment report points to a labor market coming off the boil. Other data out last week on construction spending, durable goods orders, and vehicle sales on balance provided a hint of softening. Mortgage rates edged lower in the latest week while purchase applications for mortgages declined a bit; they seem to have stabilized at a low level.

A little or a lot?

What lies ahead will depend importantly on whether bank lending pulls back a little or a lot. In the week ending March 29, deposits at the largest 25 commercial banks fell 0.4%, perhaps not surprising given the recent attention to higher yields available at money market funds. Importantly, there does not appear to be an ongoing "run" from the smaller institutions (not top 25) which saw deposits roughly unchanged for the second consecutive week.

Of some concern, loans and leases fell at small banks by $35.2 billion (0.4%) for the week, but are only $48.2 billion below the week prior to the SVB failure. These figures are somewhat encouraging, yet it remains too early to sound the all-clear with respect to a deepening credit crisis.

Investors in markets for US Treasuries and Fed funds futures appear to believe a recession is in the offing, while investors in stock markets appear to be whistling past the graveyard. We see the recent strength in indicators of real growth and stubbornly high inflation as suggesting more work needs to be done to slow demand and quell inflation.

Tightening financial conditions, either through additional Fed rate hikes — we expect another 25-basis point rise in May — or through a contraction of bank credit (or both) likely will be needed to further slow demand in product and labor markets to achieve the Fed's inflation target. The Fed's Senior Loan Officer Survey shows by a variety of measures that banks have been tightening lending standards and reducing willingness to lend; we can only expect more in the wake of the recent banking crisis.

What might reconcile seemingly divergent views between stock and bond investors is a more benign scenario enabled by a quick disinflation, only a whisper of recession so earnings don't suffer much, while the Fed is able to drop rates starting in the middle of the year. While such a scenario would be great, it's hard to see how that can be the base case.

This week's economic releases:

• Producer price index for the final demand (April 13): We estimate the PPI for the final demand fell 0.1% in March, while the core PPI, which excludes the direct effects of changes in prices for food and energy, rose 0.3%.
• Consumer price index (April 12): We estimate the CPI rose 0.2% in March, compared with a 0.4% rise in February. We expect core CPI, which excludes the volatile food and energy categories, to rise 0.4% in March following a 0.5% increase in February. Stubbornly high inflation is why we expect the Federal Reserve to hike interest rates one more time at the May 2-3 meeting of the FOMC, despite new headwinds from tightening credit conditions.
• Retail and food services sales (April 14): We estimate total retail and food services sales fell 1.0% in March. Excluding sales at motor vehicle and parts dealers, sales declined 0.8%. These would be the second monthly declines following large increases for both in January.
• Industrial production (April 14): A boost to the headline figure would reflect a jump in the output of electric and gas utilities, as temperatures switched from unusually mild in February to unusually cool in March.
• University of Michigan Consumer Sentiment Index (April 14): We expect a preliminary April reading of 61.7, down from 62.0 in March and 67.0 in February. Inflation, a major source of drag on sentiment, is not easing as quickly as consumers might have hoped.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.