Trend watch and what’s new this week
There’s more evidence that summer travel is heating up. Hotel occupancy jumped to 71.4% last week, up 4.6 percentage points in the past month to the highest level since July ’22 (slide 7). This appears to be a fairly typical summer surge.
Similarly, weekly air passengers are at 18.3 million, the third consecutive week above 18M and 18 straight weeks above 16M, the longest streak since the summer of ’19. The year-to-date passenger total is tracking very closely with 2019. Also, dining reservations are -2.7% below last year’s very strong figures. Meanwhile, most of the remaining activity-based data (slides 5 and 6) are also seeing typical seasonal increases.
First quarter growth revised up, but real incomes slipping
On slide 8, real gross domestic product (GDP) rose 2.0% on an annualized basis in the first quarter, revised upward from 1.3% in the prior report. Most of the improvement was from net exports as U.S. exports of goods and services were revised higher, along with better consumer spending and less drag from residential building. Those more than offset downward revisions to business and government spending.
On slide 9, we show real gross domestic income (GDI), which is an alternate measure of the health of the economy. GDI has fallen for the past two quarters, the first such occurrence without a recession in the past 70 years.
Manufacturing contracted for 8th straight month
Two separate gauges showed manufacturing continues to struggle. The Institute for Supply Management (ISM) Manufacturing Index fell to a reading of 46.0 in June. That’s the eighth straight reading below 50, which signifies a decrease in manufacturing activity, and the weakest reading since May ’20. The prices paid component dropped to 41.8, meaning prices decreased compared to May. It was the lowest level since December ‘22.
The final April reading of S&P Global’s U.S. Manufacturing Index also showed a contraction in activity with a reading of 46.3. That’s the seventh contraction in eight months.
Consumer confidence up, inflation worries drop sharply
On slide 11, the University of Michigan Monthly Consumer Sentiment Survey rebounded to a reading of 64.4 in June after slumping to 57.7 in May with the debt ceiling worries. More importantly, one-year inflation expectations dropped sharply, to 3.3% from 4.2% as gasoline prices moderated. Longer-term expectations appear well-anchored as the 5–10-year inflation expectations slipped to 3.0% from 3.1% in May.
Our take
Consumer confidence has improved as the debt ceiling debacle was resolved. Similarly, stocks just registered it’s best first half performance since 2019.
However, incoming economic data has remained lackluster. While the economy isn’t collapsing, the economic data isn’t strengthening either. In fact, the latest manufacturing data weakened considerably.
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.
Additionally, it appears that incomes are flattening, which isn’t a good sign. That is related to the recent dip in hours worked, including again in May; we’ll get the June figures on Friday. Incomes are directly related to and support spending; thus, sagging incomes eventually translates into softer spending, which – if it persists – tends to lead to layoffs.
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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