Trend watch and what’s new this week
We are growing concerned about freight volumes, which are the lifeblood of the economy. Rail freight carloads have dropped during three of the past four months and have remained soft during January. Port volumes have fallen for seven straight months. The broader Cass Freight Index has declined for four months in a row. While freight volumes are very seasonal, these trends defy simple seasonality.
Meanwhile, most of the remained activity-based data (slides 5 and 6) is firmer than compared to 2022. In fact, air passenger counts are now up 38.1% compared to the same week in January ’22, which is more than a half million more passengers per day. Similarly, dining reservations nationwide are running 15 percentage points higher than in 2022.
Overall growth remained solid in the fourth quarter
On slide 7, we dig a little deeper into fourth quarter gross domestic product (GDP), which rose 2.9% on an annualized basis. That was despite the big drag from residential building, which dropped 27% on an annualized basis compared to the third quarter. Additionally, we show real (inflation-adjusted) versus the nominal GDP, which remained solid.
Mixed data within housing
The overwhelming amount of housing metrics have been weak for much of 2022. Yet, a couple of the recent indicators were released this week were mixed. New homes sales (slide 8) rose for the third month in a row in December, though remains below the 20-year average and is 10.5% below the December 2019 level. Meanwhile, new home prices dipped for the second straight month, but remain 34.2% above the December 2019 level. Although other data sources indicate that prices have softened in certain cities, overall prices have been supported by limited inventories of new and existing homes for sale.
Pending sales of existing homes rose 2.5% in December, snapping a 6-month decline streak. Mortgage applications rose for the third week in a row, a feat that hasn’t happened in over six months.
We attribute all of these to a recent slide in mortgage rates, which surged nationally throughout 2022 but have eased in the past six weeks. Of course, higher rates hurt housing affordability (slide 9).
Lastly, on slide 10, the housing slowdown appears to be spilling into adjacent areas such as remodeling, which has cooled considerably in the second half of 2022.
New orders for durable goods mixed, too
On slide 11, new orders for durable goods—big-ticket items such as equipment, machinery, electronics, and office furniture—hit a fresh all-time high in December and are 33.2% above December 2019. It was driven by a spike in commercial aircraft orders. But new orders for core capital goods, which excludes the volatile aircraft and defense components, dipped 0.2% to $74.9 billion, just below the all-time high set in October.
As we mentioned here last week, the U.S. economy is clearly slowing. While there are glimmers of stabilization, which is encouraging, the overall trend does appear to be weakening.
Indeed, these crosscurrents—mixed data with some strong, some weak—are frustrating for decision-makers, investors, and average folks alike. Frankly, “why is the data so mixed?” is one of the most frequent questions we have fielded in the past year.
Of course, some choose to extrapolate the latest data point as proof that the economy is going up. We take a weight of the evidence approach, which clearly appears to be trending lower.
Again, most of the recession flags we monitor tripped months ago. No, that doesn’t mean a recession is inevitable. We can point to just as many reasons why a recession will occur along with plenty of reasons for how we could sidestep it. Still, the weight of the evidence leads us to seeing a recession in the coming 12 months, which remains our base case.
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