Economic Data Tracker – 
Cooler inflation and stronger consumer fades recession fever dream

Trend watch

Weekly air traffic is continuing its initial decent following a strong summer peak season. However, freight volumes have jumped in July, including intermodal rail carloads up 4.7% and container traffic at the top two U.S. ports (Los Angeles and Long Beach) jumped 9.1% in July. Moreover, container traffic at those Westcoast ports is up 18.8% year to date compared to last year. 

What’s new this week

• Retail sales hits another fresh all-time high as auto sales surge (slide 7).
• Consumer inflation cooling trend continued in July (slide 8).
• Consumer inflation: Food and energy well behaved in recent months, but likely won’t last (slide 9).
• Key pieces of core inflation cooling – shelter, medical services, vehicles (slide 10).
• Wholesale prices cooled in July despite rebound in energy (slide 11).
• Monthly and annual pace of rents now running below pre-COVID trend (slide 12).
• New housing activity: single-family slid further in July, but multi-family up (slide 13).
• Industrial production dinged by automotive and aircraft production, and weather (slide 14).
• Consumer confidence up in August, snapping 8-month slide, while inflation outlook remains steady (slide 15).

Our take

To paraphrase Mark Twain, “the reports of the death of the American consumer spending were an exaggeration.” While some are struggling, American consumers are alive and well, and still spending. That was reinforced by July retail sales, which notched a fresh all-time high. Even excluding the volatile autos and gasoline sales, core retail sales posted a new all-time high.

Furthermore, bar and restaurant sales hit a new all-time high.

The strength of the consumer was reiterated by the country’s largest retailer (Wal-Mart), which reported quarterly earnings that beat estimates and raised guidance for the remainder of the year.

That’s not to say that all consumers are doing great. For instance, there has been a marked increase in subprime auto defaults and delinquencies this year, although these bad credit auto loans are less than 10% of the total new car market. Moreover, overall auto defaults and delinquencies remain well behaved. Similarly, overall credit card delinquencies remain below pre-pandemic levels.

Also, weekly jobless claims (slide 3), which have suddenly become a hot topic, dropped again last week and slipped to their lowest level in a month. New claims had jumped in the weeks following Hurricane Beryl, particularly in Texas.

Nonetheless, the bulk of the incoming economic data showed that perhaps it was the July jobs report – which fueled renewed recession fears – that was out of step.

More importantly, when we search broadly for signs of weakness, they too appear more like normalization than an outright downturn. There simply isn’t wide-ranging weakness within most of the broad data trends – from retail sales and freight figures to activity-based data, such as the robust air passenger counts.

Thus, we continue to caution against painting the U.S. economy with a broad brush. Its much more complex and nuanced than it appears. The U.S. economy is cooling but not weak, especially compared to pre-pandemic trends. That is especially so given noise within some of the economic data recently. Instead, we chalk it up to further normalization, albeit uneven. Accordingly, while we are concerned about the speed of the cooling, we aren’t panicked that a recession is imminent.

Accordingly, U.S. stocks have recovered much of the ground lost after the “great August recession panic of 2024.” Likewise, the calls for the Federal Reserve (Fed) to take the extraordinary step of an emergency half-point (0.50%) rate cut have largely disappeared.

While market-based rate expectations might be a bit aggressive currently, we agree that the Fed should begin reducing rates. Right now, monetary policy appears calibrated for inflation with a 4-handle despite their preferred core inflation measure having drifted below 3% on a year-over-year basis (it was 2.6% through June). In other words, interest rates look overly restrictive if their aim is to extend the business cycle. 

Bottom line

We maintain our view that the U.S. economy is cooling but not weak, especially when compared to pre-pandemic figures. However, it’s steadily  becoming more apparent that interest rates are overly restrictive to the point of hampering growth. The Federal Reserve is on track for a rate cut in September.