Trend watch and what’s new this week
The activity-based data (slides 5 and 6) remains mixed. Most of travel-related data, including hotel occupancy and air passenger counts, has continued to slide. But restaurant bookings rebounded considerably in the past two weeks, up 4% compared to the same week in 2019. Temp staffing and back-to-office have also rebounded since mid-August. Yet, rail traffic and overall mobility have softened.
Recession watch: 2nd quarter revised upward
On slide 7, we dig a little deeper into second quarter gross domestic product (GDP), which was revised upwardly modestly. It fell 0.6% on an inflation-adjusted (real) annualized basis rather than the initial report of
-0.9%. We show the composition and revisions, including strong consumer spending. We also show that the biggest impact came from business inventories, along with the trend of business inventories.
We also received real personal income and spending figures for July. Both of those are part of the so-called “big 4” indicators of economic activity used to determine a recession (slide 8). While they have flattened out, which shows that the economy is slowing, the big 4 don’t indicate the U.S. is currently in a recession.
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 5.8% nationally. Higher rates hurt housing affordability. Pending sales of existing homes fell for the eighth time in nine months.
On slide 9, new home sales dropped sharply in July. New home prices actually rose 5.9% MoM, but prices are off their highs and other data sources indicate that prices are softening in certain cities and regions.
Additionally, on slide 10, we address the inventory of homes for sale (both new and existing). While the number of new homes under construction have risen from their lows, completions near a 20-year low. Similarly, existing home inventory remains near the lowest level in 40 years.
Consumer sentiment up in August, inflation expectations stabilizes
Consumer sentiment remains quite gloomy, driven by inflation pressures and recession concerns. Yet, the University of Michigan Consumer Sentiment Survey rebounded in August after crashing in June to the lowest level since the survey began in 1978 (slide 11). Meanwhile, within the survey, long-term inflation expectations appear to be stabilizing. This is a key indicator for the Federal Reserve (the Fed), which is keen on reining in inflation expectations.
On slide 12, we highlight new orders for core capital goods, which hit fresh all-time high in April. These are new orders, which suggests that demand for business equipment remains solid despite inflation and higher interest rates.
Inflation dipped in July, but energy presents a problem
The Federal Reserves’ (Fed) favorite inflation gauge—the price index of core personal consumption expenditures—fell sharply in July (slide 13). While it is moving in the right direction, it is still uncomfortably high and well above the Fed’s 2% target, meaning Fed rate hikes will continue.
However, energy prices remain a challenge. Indeed, crude oil prices have dropped from their June highs, bringing down gasoline prices. Yet, U.S. crude oil inventories continue to drift lower (slide 14), suggesting that gasoline prices will remain elevated.
Meanwhile, natural gas prices have jumped more than 50% in the past two months (slide 15). Natural gas exports have jumped, while imports have declined. Similarly, this suggests that natural gas prices will remain elevated. It also means higher U.S. electricity prices since natural gas is the fuel source for nearly 40% of U.S. power generation.
On slide 16, we delve into the student loan forgiveness plan proposed by the White House. We say plan because—at the very least—it will likely face a challenge in court. Additionally, it raises more questions than answers. In our view, it offers very modest macro benefits as currently structured.
Seemingly, every strong economic report has been paired with a weak report in recent months. In fact, some have conflicting data within the same report. Case in point: July new home sales fell, but prices rose. Both are accurate in our view but have very different drivers. For instance, sales dropped because of higher mortgage rates, but prices haven’t fallen as dramatically since there simply isn’t enough available inventory in most areas (new or existing). Thus, whatever sales do occur transact at elevated prices. Nonetheless, it highlights the continuing crosscurrents within the economic data, which will persist for the foreseeable future.
Lastly, Fed Chair Jay Powell bluntly reiterated the Fed’s recent talking points at the Jackson Hole Economic Symposium. He directly and unambiguously stated that the Fed would stay the course with its hawkish stance, maintaining its focus on reducing generationally high inflation.
His comments were primarily geared towards refuting the notion the Fed would quickly cut the fed funds rate next year (the so-called “Fed Pivot”). He pointedly referenced history regarding the dangers of prematurely loosening policy as validation to keep rates higher for longer.
The Fed is likely to raise interest rates by 0.50% or 0.75% at the September meeting, likely determined by incoming data for inflation, jobs, income, and spending.
Yet, he didn’t comment on the Fed’s balance sheet reductions. We expect the Fed to double the pace of its balance sheet reductions beginning next month as planned. The monthly roll-off will accelerate to $60 billion for U.S. Treasuries and $35 billion agency mortgage-backed securities.
The Fed’s policy maneuvers will further tighten financial conditions and set up a delayed drag on the U.S. economy in the months ahead. Until inflation meaningfully and persistently cools, the Fed’s attack on inflation will likely continue to pull yields somewhat higher and provide a challenging backdrop for riskier assets.
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