Trend watch and what’s new this week
Summer travel appears to be in full swing. Weekly air passengers climbed to 18.2 million, the highest level since July ’19. This marks 17 straight weeks above 16 million, which is also the longest streak since the summer of ’19. The year-to-date passenger total is tracking very closely with 2019, narrowly off the pace (-0.07%).
Similarly, hotel occupancy jumped to 70.8% last week, up 3.3 percentage points in the past month and the highest level since July ’22. However, dining reservations have tough comparisons to very strong 2022 figures, running -5% below last year. Meanwhile, most of the remaining activity-based data (slides 5 and 6) is also seeing typical seasonal increases.
New orders for durable goods mixed as core orders sputter
On slide 7, new orders for durable goods—big-ticket items such as equipment, machinery, electronics, and office furniture—rose 1.7% in May. That was largely due to a 32.5% spike in commercial aircraft orders. But new orders for core capital goods, which excludes the volatile aircraft and defense components, rose 0.7% and is up just 2.1% from a year ago, slower than the pre-pandemic three-year average of 3.1%.
Economic data surprising to the upside, but isn’t stronger
On slide 8, we show the Bloomberg Economic Surprise Index, which illustrates how economic data has consistently beat expectations since early May. This has contributed to the stock market’s rebound in May and June. While surprising is “good” for markets, it hasn’t been necessarily stronger. With several notable exceptions, such as new housing figures, much of the economic data in recent months has been lackluster at best, while some have been declining, including most of the manufacturing data.
Consumers wobbling a little but still buoyed by cash
On slide 9, we review the number of business and nonbusiness (aka personal) bankruptcy filings, which has jumped dramatically in 2023. Yet, while the rapid increase is concerning, both remain below pre-pandemic levels and well below their Great Financial Crisis levels.
Perhaps consumers’ financial picture are better thanks to the still-elevated cash buffers. While bank deposit levels have declined in 10 of the past 13 months, overall bank deposits remain roughly $4 trillion above pre-pandemic levels (slide 10).
Lack of supply driving new housing uptick
New housing metrics continue to show signs of life after being pummeled during most of 2022, having declined in 8 of the 12 months. New homes sales (slide 11) jumped in May and rose for the seventh time in eight months. Prices also rose for the third time in four months.
Our take
There continue to be crosscurrents within most economic reports. Yet, as we have repeatedly noted, while most data is 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. Housing is clearly less interest rate sensitive currently, apparently overwhelmed by a severe housing shortage. The housing market has restarted quicker than expected due to the severe housing shortage coming into the pandemic, and the deficit has grown to 3.8 million, according to estimates by Freddie Mac. Moreover, most of the forward-looking housing indicators point to further upside.
It is possible that the U.S. could skirt a recession. It’s becoming increasingly plausible that we may only see one negative quarter of gross domestic product (GDP). That said, it would be unprecedented to avoid a recession with weakening leading indicators, higher interest rates, and tighter financial and credit conditions.
Accordingly, 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 mild recession remains our base case as dramatically higher interest rates and tighter credit conditions place additional stress on consumers and businesses going forward. This now includes restarting student loan payments later this year as a result of the recent federal debt deal. We also believe that the Fed will keep interest rates higher for longer. But there’s a little more wiggle room that the U.S. could skirt a recession.
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