Economic Data Tracker –
More mixed signals within housing

Economic Data Tracker

May 18, 2023

Our weekly view on the economy including rationale on GDP, jobs report, and Fed policy decisions. Download the entire weekly edition to view timely charts and data providing a comprehensive picture of how incoming economic data affects our economic outlook.

Trend watch and what’s new this week

Weekly air passengers topped 16.8 million, the highest weekly sum since 2019 as air travel continues to defy high prices, sour sentiment generally, and weak trends elsewhere. That stretches the number of weeks above 16 million to 10 straight, the longest span since the summer of 2019.

The rest of the activity-based data (slides 5 and 6) mostly improved in recent weeks as well. For instance, the staffing index continues to rebound after softness during the early spring months.

On slide 7, we show a key freight metric, unit volumes of shipping containers, which notched their first back-to-back gains since the autumn of 2021. Yet, volumes remain well below the long-term trend.

Existing home sales down 16 of the past 17 months

On slide 8, existing single-family home sales dropped 3.5% to an annualized rate of 3.85 million in April, which is 20.5% below the December 2019 level. Yet, with continued limited supply, home prices rose for the third consecutive month, up 3.6% to $393,300 in April. That’s 42% above the December 2019 level. There’s a wide variation based on location, with prices softening in markets that had the largest post-pandemic increases, especially in the West.

New housing activity showing signs of stabilization

On slide 9, we updated several of the new housing metrics. Total new building permits fell for a second month, though single-family permits increased for a third straight month after not increasing for 12 months prior.  Housing starts rose in April, but the March figures were revised substantially lower. Both were dramatically impacted by the sharp increase in mortgage rates, which rose more than 3 percentage points during 2022.

Also on slide 9, new home buyer traffic ticked higher in April, up from extremely depressed levels. That helped the NAHB Market Index, which is the builder sentiment survey, increase for the fifth consecutive month.

Retail sales up in April, snapping two-month skid

On slide 10, retail & food service sales in April rose 0.4% MoM to $686.1 billion, which is just 0.9% below the all-time high set in January. Gasoline sales, down 0.8%, were a big driver, while auto sales rose 0.4% during the month. Excluding both autos and gasoline, retail sales rose 0.6% in April, hovering near the all-time high.

Big 4 indicators continue to look solid

On slide 11, we updated the four primary indicators used to date a U.S. recession. The so-called Big 4 suggest the economy is slowing, though not yet in a recession. That is especially true after we received solid industrial production figures for April, which rose to a five-month high

Our take

Alas, crosscurrents in the incoming economic data continue, though tilted negative. The latest examples were within the housing data. On the positive side, new home buyer traffic appears to have bottomed from extreme levels during 2022. That is likely feeding the rise in single-family permits for the past three months. Conversely, existing home sales have dropped for 16 of the past 17 months, an ugly streak in any circumstance.

As we have noted, a recession isn’t inevitable, nor is the economy collapsing. That said, it would be unprecedented to avoid a recession with weakening leading indicators, higher interest rates, and tighter financial and credit conditions.

Moreover, the “will they/won’t they” debate is raging as to whether the Federal Reserve will hike rates again at their June meeting. Inflation remains a headwind for the economy, which has hamstrung the Fed’s ability to change monetary policy. While the April data shows that it has clearly peaked, elevated inflation remains public enemy number one and will continue to dictate the Fed’s future actions.

This is especially true given the continued strength in the labor market. Although monthly job growth has stepped down compared to very strong results in 2021 and 2022, the U.S. has averaged 277,800 new job openings for the past six months. That’s over 100,000 per month more than the pre-pandemic 3-year average of 177,000. Furthermore, the unemployment rate dipped to 3.4% in April and matched the cycle low. Indeed, these are backward-looking indicators. Still, the forward-looking indicators, such as weekly jobless claims, are weakening but not weak.

Therefore, we reiterate our view that Fed policy is being guided by scar tissue—from prematurely loosening policy in the past. Furthermore, we believe the market’s expectations for rate cuts this summer are misplaced. Rate cuts are plausible in the coming year, particularly in the event of a sharper recession, but not that soon.

Lastly, we maintain our view that the coming economic slowdown will be relatively mild compared to the Great Financial Crisis and Pandemic recessions. Accordingly, we anticipate a continued gradual weakening of the economy rather than a sudden downshift. 

Bottom Line

A recession remains our base case as dramatically higher interest rates and tighter credit conditions place additional stress on consumers and businesses going forward. We also believe that the Fed will keep interest rates higher for longer. 

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