Trend watch and what’s new this week
Summer travel activity remains solid, but is beginning to fade, which is typical historically (slides 5 and 6). For instance, the weekly air traveler count has slipped for three weeks in row, but the year-to-date tally is running slightly ahead of 2019. Similarly, hotel occupancy and restaurant bookings have dipped. That said, restaurant bookings in Honolulu have surged as people have fled catastrophic wildfires in Maui.
Consumer inflation moderating but core prices still elevated
On slide 7, the Consumer Price Index (CPI) rose 0.2% in July, maintaining the same pace as June. The year-over-year pace ticked upward to 3.2%, snapping a streak of twelve consecutive declines.
On slide 8, core CPI, which excludes food & energy, also rose 0.2% month-over-month – holding steady for a second straight month and matching the slowest pace in 29 months. It increased 4.7% from a year ago, down from the peak of 6.6% in September ’22. Used vehicles, which have dropped 5.6% from a year ago, remain among the biggest decliners. Prices for services rose 0.3%, holding fairly steady for the past five months. Although shelter has cooled, it remains well above the pre-pandemic pace.
Wholesale prices reaccelerating after Spring collapse
On slide 9, wholesale prices, as measured by the Producer Price Index (PPI), reaccelerated to 0.3% in July, the fastest pace in six months. The year-over-year pace rose 0.8%, though is dramatically lower than 11.7% in March ’22. Core PPI, which excludes food & energy, also rose 0.3% month over month, the fastest pace in eight months, while the annual change continued to slide, up 2.4% from a year ago. Services prices rose 0.5%, the most in 11 months.
Private rental data shows prices have stabilized
On slide 10, we show rents from private rental sources for new leases. Rents spiked during 2021, including a jump of 2.0% during July ’21. That continued in 2022, growing 0.9% per month on average through September ’22, but rents have cooled considerably since then. Rental prices in July rose 0.5% month over month, which is cooler than the 0.6% increase in June and roughly in-line with the pre-pandemic 5-year average jump of 0.4% in July.
Consumer confidence jumped, but inflation expectations up, too
On slide 11, the University of Michigan Monthly Consumer Sentiment Survey slipped modestly to a reading of 71.2 in August from 71.6 in July. However, longer-term (5–10-year) inflation expectations dipped to 2.9%, the level lowest in five months. One-year inflation expectations also edged lower to 3.3%.
We have repeatedly discussed crosscurrents even within the same report. The July consumer and wholesale inflation data were quite simply more examples as both showed cooling and reacceleration. The consistent trend has been that goods prices are generally waning, while prices for services are reaccelerating.
Indeed, these crosscurrents complicate the Federal Reserve’s (Fed) attempts to stabilize prices. The overall cooling trends of economic data may provide another opportunity for the Fed to skip hiking interest rates, much as it did in June. However, the resilience of the overall economy – especially for services prices as well as wages – will likely require further rate hikes to tame inflation.
This is why we are beginning to view a soft landing scenario as self-defeating – the stronger the economy remains ultimately translates into higher interest rates for longer as the Fed battles persistent inflation.
Furthermore, a soft landing scenario undercuts the need for rate cuts, which futures-based market expectations see happening as soon as the March ’24 Fed meeting. At the very least, the Fed will need to maintain rates higher for longer lest inflation reaccelerate.
Alas, this is why we maintain our view that a recession, accompanied by eventual job losses, is likely. Frankly, it would be unprecedented to avoid a recession with weakening leading indicators, higher interest rates, and tighter financial and credit conditions. Additionally, we are concerned about restarting student loan payments for 46 million people in the next few months. In our opinion, that’s going to take a LOT of wind out of the economy. And we didn’t even get into the discussion of what parts of the economy will buckle under higher interest rates for an extended period. For example, commercial real estate appears particularly vulnerable.
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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