Trend watch and what’s new this week
Summer travel is winding down, following historical patterns (slides 5 and 6). For instance, the weekly air traveler count has slipped for the fourth week in row. In 2019, counts fell for six weeks after peaking in late July before rebounding during the week of Labor Day; in 2021 and 2022 it was eight and five, respectively. Thus, we expect to see two or three more weekly declines until Labor Day. Yet, the year-to-date tally continues to hug the 2019 pattern. Meanwhile, most of the other economic data continued to beat expectations, including retail sales, industrial production, and the housing data.
New housing activity continues to show signs of stabilization
On slide 7, we updated several of the new housing metrics. Total new building permits edged up 0.1% in July, but single-family permits rose 0.6% and haven’t fallen in ’23. Meanwhile, housing starts rose 3.9%, rebounding sharply after dropping 11.7% in June due to wetter than normal weather through much of the U.S. and widespread flooding in some areas.
Also on slide 7, new home buyer traffic dropped in August, the first decline in 8 months. Similarly, the NAHB Market Index, which is the builder sentiment survey, fell in August, its first decline in 7 months.
Retail sales up in June, near all-time high, but slower pace
On slide 8, retail & food service sales in July jumped 0.7% MoM to $696.4 billion, setting a fresh all-time high. Online sales jumped 1.9% during the month, boosted by Prime Day, along with back-to-school spending on items such as clothing. Gasoline sales also rose, up 0.4%, snapping an 8-month decline streak. Excluding both autos and gasoline, retail sales jumped in 1.0% in July, also reaching a new all-time high.
Big 4 indicators solid but production stumbling
On slide 9, 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 improved in July after falling to a six-month low in June.
The capacity utilization rate – the percentage used in production vs. idle – also rebounded in July, to 79.3%, and snapped a two-month decline streak. Both industrial production and capacity utilization were boosted by auto production, which jumped 8.7% in July. Yet, both remain below consistently stronger readings in 2022.
Leading economic indicators still falling
On slide 10, the Index of Leading Economic Indicators (LEI) fell to a 37-month low (June ’20) and hasn’t increased in 17 months. It remains negative on a year-over-year basis, though it improved to -7.5% in July. Historically, when it has dropped more than 2.5% year over year, it has coincided with the start of a recession.
Our take
We are encouraged by some of the stronger-than-expected July data, including retail sales, auto sales, housing starts, construction spending, and industrial production.
The Atlanta Federal Reserve’s GDPNow, which is a tracking estimate based on incoming data, has jumped to project 5.8% growth in the third quarter. But, as much as we love GDPNow, it isn’t forward-looking. Basically it’s telling us, “based strictly on the data we’ve already received – if the third quarter ended right now – we’d have 5.8% growth.” However, a quarter isn’t three or four weeks long. In fact, we haven’t even received one-third of the third quarter data yet. Moreover, GDPNow is very volatile, pushed around by incoming data. Thus, scoring a few runs in the first few innings doesn’t mean the team will win the entire game.
Regarding the July strength, most of those better-than-expected figures were one-offs and partly double-counting a few items; most notably, autos and residential construction. For instance, auto production was slow during May and June (for various reasons), which held back auto sales, retail sales (which includes auto sales), and industrial production in those months. That reversed in late June and July.
Similarly, housing starts and construction spending in May and June were impacted by wetter than normal weather through much of the U.S., along with widespread flooding – that also reversed in July and was reflected in both housing starts and construction spending data. However, new building permits – which aren’t in GDPNow but are a leading economic indicator – are running -13% below ’22.
Furthermore, the leading economic indicators continue to point downward, including an ugly streak of 17 months without an increase. Therefore, we’d reiterate the need for patience and some perspective. Yes, some of the recent economic data has improved, but nearly all of their respective trends, along with the leading indicators, don’t paint a pretty picture that aligns with all of the soft and no landing talk.
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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