Trend watch and what’s new this week
COVID-19 continues to fade as confirmed cased have fallen dramatically in the past three weeks. Similarly, the rate and percentage of COVID-19 hospitalizations and deaths are dropping.
Meanwhile, the activity-based data (slides 5 and 6) remains mixed. Most of travel-related data slipped modestly to start August, including hotel occupancy and air passenger counts. But restaurant bookings has rebounded, flipping to positive compared to the same week in 2019. Temp staffing and rail traffic also rebounded in mid-August after tripping in early August.
More weakness within housing
Several key housing metrics were released this week, all of which weakened. We attribute all of this to dramatically higher mortgage rates, which have stayed above 5.5% nationally, though remains below the peak of 6% in June. Higher rates hurt housing affordability.
Existing home sales figures (slide 7) dropped for the sixth month in a row in July; however, median prices fell for the first time since January.
On slide 8, new building permits fell for the second time in three months. Also, new housing starts fell for the fifth month in a row. Additionally, we show the National Association of Home Builders (NAHB) traffic of prospective buyers index and the NAHB Housing Market Index, which gauges homebuilders’ confidence. Both have weakened considerably in the past, nearing the lows of the pandemic.
On slide 9, we show the Index of Leading Economic Indicators, which has dropped for five straight months. That is a recession red flag and bears watching.
Consumer still appears solid
On slide 10, we show retail & food sales, which inched up slightly in July. However, sales of autos (still hampered by supply chain issues) and gasoline both fell sharply during the month and account for roughly 30% of total retail sales. Still, sales hit a fresh all-time high. We also show an index view on slide 11, which illustrates the strength of this recovery compared to the prior two recessions.
We reiterate our warning that crosscurrents within the economic data will continue for the foreseeable future. Case in point: housing and retail sales offer compelling yet differing views of the U.S. economy. The former is in a steep downward spiral, reacting to both dramatically higher mortgage rates in 2022 and home prices since the reopening. The latter is buoyed by continued wage and income growth, along with a powerful shift in consumer spending back towards services rather than goods.
Both are accurate in our view, highlighting the crosscurrents. And both will very likely persist for many more months.
We anticipate that new and existing home sales will continue to decline. On the other hand, we expect new and existing home prices to remain elevated generally given the tight supply of both. While higher mortgage rates will cool housing sales further, more than a decade of underbuilding will likely continue to support prices, especially in the south, which accounts for more than 50% of all new home sales.
Conversely, we expect that consumer spending will continue to defy the “weak consumer” narrative. We believe that markets rightly concluded that retailers were overstocked this spring but extrapolated it into a misplaced view that consumers were buckling because of inflation. On the contrary, consumers were simply shifting their spending back towards services, which is typically a much larger slice of spending than goods. Evidence of this includes robust spending at restaurant & bars, which hit a new all-time high and remain nearly 20% above the pre-pandemic trend. While that won’t continue indefinitely, it does strongly contradict the notion that consumers are tapped out.
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