Trend watch and what’s new this week
Activity has rebounded following the 4th of July holiday, rippling though the activity-based data (slides 5 and 6). Most are tracking with historical patterns. For example, hotel occupancy rebounded sharply to 72.0% from a holiday-depressed 61.8% during the week of July 4th. Rail traffic spiked 17.2% last week to 478,153 carloads, the second most in 2023 and narrowly missing the most by just 0.4%. And the weekly count of air passengers hit 18.35 million, a fresh new post-pandemic high.
Existing home sales down 17 of the past 19 months
On slide 7, existing single-family home sales dropped 3.4% to an annualized rate of 3.72 million in June, which is 20.5% below the December 2019 level. Yet, prices rose for the fifth consecutive month, up 3.6% in June to $416,000, which is 50.2% above the December 2019 level. That’s due to very limited supply. There’s a wide variation based on location, with prices softening in a few markets in the West that had the largest post-pandemic increases, but generally climbing elsewhere.
New housing activity showing signs of stabilization
On slide 8, we updated several of the new housing metrics. Total new building permits fell 3.7% in June, but single-family permits rose 2.2% and haven’t fallen in ’23. Meanwhile, floods in parts of the U.S. pushed down housing starts, which dropped 8.0% in June, and the May figures were revised substantially lower.
Also on slide 8, new home buyer traffic increased for the sixth time in seven months in July. That helped the NAHB Market Index, which is the builder sentiment survey, increase for the seventh consecutive month.
Retail sales up in June, near all-time high, but slower pace
On slide 9, retail & food service sales in June rose 0.2% MoM to $689.5 billion, which is just 0.4% below the all-time high set in January. Auto sales, which rose 0.3%, were a big driver, while gasoline sales fell 1.4% during the month. Excluding both autos and gasoline, retail sales notched a fresh all-time high after increasing 0.3% in June.
Big 4 indicators solid but production stumbling
On slide 10, 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. Industrial production figures for June fell to a five-month low and declined for the second straight month. The capacity utilization rate – the percentage used in production vs. idle – fell to 78.9%, which was the second consecutive MoM decline and matched the 21-month low.
Our take
The sentiment pendulum on any topic – from recession, rates, and inflation to earnings and stocks – tends to swing from one extreme to the other. Though the oscillating can be dizzying and frustrating, it can be healthy insofar as it shakes up complacency.
Once again, the consensus on the recession appears to have swung strongly – with many now believing that there definitely isn’t a recession in the offing. That’s a complete flip from six months ago, when the overwhelming view was centered on “how deep” the coming recession would be. In both cases, we’d say, “not so fast.”
We acknowledge that resilience in the economy has increased the probability that the U.S. could skirt a recession – a so-called soft landing. At the beginning of this year, we said a soft landing had less than a 10% chance. Now, that chance is essentially 40% – dramatically higher but still not our base case. In essence, there are a wider range of outcomes due to many crosscurrents, which is among the reasons why we said “stay flexible” in the ’23 outlook.
To be clear, there are many interpretations of a soft landing. Our view is a soft landing could be a quarter or two of negative gross domestic product (GDP) but without job loss or a meaningful rise in the unemployment rate (an increase of greater than 0.5%). That’s what occurred in the first half of 2022. Or several other scenarios, including a so-called rolling sector recession – whereby industries contract but are not synched up – allowing the overall economy to skirt. For instance, housing crashed in ’22, but transportation slowed earlier this year and manufacturing is contracting now, etc.
At this point, the fourth quarter of this year will likely post negative GDP, if for no other reason than the restarting of student loan payments. Inflation has clearly peaked and is moving lower but remains much hotter than anyone is (or should be) comfortable with. The Federal Reserve (Fed) remains concerned about the labor market and, more specifically, wages. We believe the Fed will hike rates by a quarter point (0.25%) next week.
The latest issues are related to labor with three strikes – the Hollywood writers, now the actors, and the growing threat of the Teamsters-UPS strike. Before you scoff at the relevance of the writers and actors striking – it directly impacts roughly 175,000 workers and supports billons in economic activity. The looming Teamsters-UPS strike is a much bigger issue since UPS transports roughly 6% of GDP. Combined, these three strikes represent more than half million workers. (We are writing a note covering the strikes that should be published in the next few days.)
Bottom Line
A shallow recession remains our base case as dramatically higher interest rates and tighter credit conditions ratchet up 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. Yet, a recession isn’t inevitable.
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