Economic Data Tracker –
Air passenger traffic tops 17.4 million

Economic Data Tracker

May 26, 2023

Our 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

Right on cue, weekly air passengers climbed above 17.4 million for the first time since August 2019. That stretched the number of weeks above 16 million to 11 straight, the longest span since the summer of ’19. The year-to-date passenger total is running just -0.02% behind 2019.

Most of the remaining activity-based data improved in recent weeks (slides 5 and 6). For instance, rail carloads increased for the second straight week, while hotel occupancy jumped to 67.5%, which was a nine-week high.

First quarter growth revised upward

On slide 7, we dig a little deeper into first quarter gross domestic product (GDP), which rose 1.3% on an annualized basis compared to the initially reported 1.1% pace. The biggest change was an upward revision to business inventories, which shrank less than previously estimated. Business and consumer spending were also revised upward modestly.

Lack of supply driving new housing uptick

New homes sales (slide 8) rose 4.0% in April to an annualized rate of 683,000, roughly in-line with the 20-year average, though are down 1.4% from the December 2019 level. Sales were likely helped by prices, which dropped 7.7% in April. Still, prices remain 27.7% above the December 2019 level. Overall prices have been supported by limited inventories of new and existing homes for sale.

New orders for durable goods up as core orders sputter

On slide 9, new orders for durable goods—big-ticket items such as equipment, machinery, electronics, and office furniture—rose 1.1% in April, along with upward revisions to the March data. New orders for core capital goods, which exclude the volatile aircraft and defense components, also rose in April but have declined in four of the past eight months.

The Fed’s favorite gauge show inflation remains sticky

The Federal Reserves’ (Fed) favorite inflation gauge—the price index of core personal consumption expenditures (Core PCE)—rose in April (slide 10). While it has been moving in the right direction and is down from its March ’22 high of 5.4%, it ticked higher in April to 4.7% from a year ago. That remains uncomfortably high and well above the Fed’s 2% target, meaning there’s still a case for rate hikes to continue based on persistent inflation.

Speaking of inflation, the one-year inflation expectations within the University of Michigan Consumer Sentiment Index dropped sharply to 4.2% from the preliminary reading of 4.5%. The overall Consumer Sentiment Index rose to 59.2 from the preliminary reading of 57.7, though remains below the most recent high of 67.0 this past February.

Services rebounded in May, but manufacturing slumped

On slide 11, the preliminary May readings for S&P Global U.S. Purchasing Managers Index (PMI) for services rose to 55.1, which was its highest reading in 13 months and fourth consecutive monthly increase. But the U.S. manufacturing index swung to 48.5, contracting for the sixth time in seven months.

Big 4 indicators continue to look solid

On slide 12, we updated the four primary indicators used to date a U.S. recession. We received real personal income and spending figures for April. Both are part of the so-called “big 4” indicators of economic activity used to determine a recession. While the pace has moderated for all four measures, reflecting the sluggishness of the economy, the big 4 don’t indicate the U.S. is currently in a recession. That said, none of these are forward-looking indicators. 

Our take

In the intro we said, “right on cue,” because topping 17 million passengers in the U.S. mirrors pre-pandemic summertime numbers. Furthermore, cruise lines are reporting that many sailings are above 100% occupancy, which means more than the standard two people per cabin.

Overall consumer spending has begun to flicker. Yet, it is markedly split by income level, whereby stronger higher-end spending is masking weaker outlays by the masses. Retail sales fell three of the past five months but are hovering near all-time highs (in dollar terms). Similarly, travel-related spending remains solid, including advanced paid bookings for this summer, especially for international travel.

Credit quality has deteriorated further, though the largest deterioration has been chiefly with subprime income borrowers, and revolving credit balances continue to climb.

The shift in spending from goods back towards services has continued, as evident by the aforementioned air and cruise passengers. Supply is still an issue in parts of the economy, particularly housing and autos, which has helped stabilize activity in both.

While most data are coming in below ’22 levels, it isn’t necessarily weak compared to pre-pandemic levels and trends. The economy isn’t collapsing nor is a recession necessarily inevitable. It is possible that the U.S. could skirt a recession. That said, it would be unprecedented to avoid a recession with weakening leading indicators, higher interest rates, and tighter financial and credit conditions. Accordingly, a recession remains our base case in ’23.  

Lastly, we maintain our view that the coming economic slowdown will be relatively mild compared to the Great Financial Crisis and Pandemic recessions. 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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