More signs are pointing to an imminent slowdown in the US economy

• The US economy is showing signs of a sudden slowdown after a year of tightening financial conditions.
• Retail sales are starting to decline as the job market shows signs of finally weakening.
• "Expectations of tightening lending standards contributed to the market's concern that an economic slowdown is unfolding in real time," LPL said.

There is growing evidence to suggest that the US economy is hitting the brakes, and it could ultimately threaten the stock market as investors gauge whether the bad news will tempt the Federal Reserve to stop its interest rate hikes or keep tightening.

New signs started flashing earlier this week when the ISM survey showed manufacturing activity declined in March to 46.3, the lowest level since May 2020. All components of the manufacturing index declined below 50 for the first time since 2009. A reading below 50 indicates that manufacturing activity is contracting.

Data on the employment front also showed signs that the consistently hot labor market over the past few years is starting to weaken. The ADP jobs report showed 145,000 jobs were added in March, missing expectations by 65,000 and well below February's reading of 261,000.

The weakness in economic data didn't stop there. Job openings fell below 10 million in February for the first time since May 2021, and weekly jobless claims hit 228,000 last week, ahead of the 200,000 analysts expected.

The Federal Reserve Bank of Atlanta is taking notice of the weakening economic data, having lowered its GDP forecast considerably over the past two weeks. Towards the end of March, the GDPNow forecast from the Fed expected the US economy to grow 3.5% in the first-quarter. Two weeks later, it slashed its GDP forecast to just 1.5%.

A potential economic slowdown is also starting to show up in retail sales growth, which fell 0.4% in February. That weakness could spill over into March based on Costco's results. The wholesaler said retail sales growth fell 0.9% at its stores in March, representing its first monthly sales decline in almost three years.

And while more and more data points suggest that consumers are curtailing their spending, some Fed Presidents don't seem to mind as they remain focused on taming inflation.

Fed President Loretta Mester said on Tuesday that interest rates need to rise above 5% and stay there for some time to combat inflation, and Fed President Bullard reiterated his view on Thursday that the Fed can continue to hike interest rates while using other monetary policy tools to handle potential financial stress.

But with inflation showing more signs of easing, the Fed could be overdoing it with its tightening policies and eventually break something bigger than Silicon Valley Bank, which would spell trouble for both the economy and the stock market.

Mester's comments "contributed to the market's increasing concern that an economic slowdown is unfolding in real time," LPL's chief global strategist Quincy Krosby told Insider.

The stock market is now in "watch" mode as it consolidates sideways and gauges whether the Fed will pause its interest rate hikes, and whether corporate earnings results will prove as resilient as they have over the past year.

"Markets are now on active watchful waiting. Waiting for more evidence and data is the market's job and moving sideways between the extreme messaging from the bulls and bears is the pragmatic course before a conclusive decision is made," Krosby said.

First-quarter earnings season kicks off next week with the bank stocks, while the March jobs report will be released this Friday, when the stock market is closed for Good Friday.

"Maybe it's a good thing that markets are closed on Friday for the release of the payroll report considering its importance in terms of the recession debate," Krosby said.