Note: As always, there is a separate Economic Commentary discussing the monthly jobs report, which was published on July 3rd.
Trend watch
Summer travel continues to ramp higher. While it's too early to tell, it does appear that Americans staying stateside is offsetting the decline in Canadian visitors – at least in the high-level numbers. That said, we’ve heard of some anecdotal reports that parts of Florida – that are traditionally popular with Canadian visitors – are softer than normal.
Hotel occupancy has jumped to the highest level since last July. It typically peaks in the middle of July. Similarly, air passenger counts should hit peak levels in the next couple weeks. We expect it’ll touch 20 million, which would be a new record, from 19.4 million currently.
Meanwhile, U.S. rail volumes continue to recover, up for four straight weeks after an ugly five-week slide during May and early June.
Our take
This week, we observed another wave of important economic reports, as data releases navigate the Independence Day holiday. Overall, the tone of the incoming information remained mixed, although high-frequency travel statistics continued to show strength.
For instance, two significant purchasing managers indices (PMIs) indicated opposing trends. The manufacturing PMI showed contraction in June, while the services PMI experienced expansion after a decline in May. Additionally, overall construction spending decreased in May.
On the other hand, new auto sales in June fell for the third consecutive month, following a tariff-induced surge in March. Naturally, the auto sector is at the epicenter of tariff impacts — from consumers and parts suppliers rushing to get ahead of new levies, to automakers facing a 25% tariff based on non-U.S. content, along with a separate hike in steel and aluminum tariffs to 50%. The new auto tariffs took effect in April, while the steel and aluminum increases began in early June.
New auto sales have hit an air pocket as demand normalizes following the March buying frenzy.
There’s also the aforementioned ripple within freight volumes, which have swung wildly in the past two months due to on-again/off-again tariffs. This is particularly significant for freight shipping from China, which is our third-largest trading partner and accounts for about one-third of imported container volumes.
As we brace for further volatility, it's crucial to consider the potential impact that these shipping fluctuations may have on other economic indicators in the coming months. Notably, these shifts are likely to lead to considerable variations in economic data released throughout July, August, and beyond.
Given the short-term distortions in the economic data, we recommend avoiding sweeping conclusions based solely on this information. It is prudent to maintain a broader perspective and adopt a long-term outlook until trade policies become clearer. For the time being, the true underlying trends may not be as negative or positive as they appear, depending on the specific economic variable involved.
One silver lining has been the remarkable resilience of the U.S. economy. Payrolls rose by 147,000 in June, well above consensus expectations, and was coupled with upward revisions to the prior two months' totals. Moreover, the unemployment rate dipped to 4.1%. It reinforces our view that the U.S. economy will muddle through all the tariff uncertainty.
Looking ahead, we anticipate that the government policy backdrop will improve in the next few weeks. For instance, there should be more clarity on tariffs, albeit not fully, while Congress appears set to resolve the massive tax bill and lift the debt ceiling. Addressing these issues would help reduce economic uncertainty. This should also provide some clarity for the Federal Reserve (Fed) to begin cutting rates later this year.
Bottom line
The U.S. remains in a ‘muddle-through’ environment—where growth is slowing but not stalling—and we expect the Fed to stay in ‘wait & see’ mode for now. We also anticipate economic data will continue to jostle about due to tariffs—replete with air pockets as demand normalizes following accelerated purchases in the early spring when consumers and businesses attempted to front-run tariffs.
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