Trend watch and what’s new this week
Activity is closely following pre-pandemic historical patterns, which is currently winding down summer travel (slides 5 and 6). It is remarkable how closely air travel has mirrored 2019, albeit with ’23 maintaining a slim 0.1% lead year-to-date compared to ’19.
More importantly for domestic tourism, international travel to the U.S. is up 21% from a year ago, notching a post-pandemic high of 3.14 million in July (slide 7). And that’s before the typical summer peak in August. Most of the rebound has been from Western Europe and Asia. Yet, the number of foreign travelers remains 23% below the August 2019 level.
Existing home sales down 17 of the past 18 months
Existing single-family home sales dropped 1.9% to an annualized rate of 3.65 million in July (slide 8), which is 24.6% below the December 2019 level. Meanwhile, prices fell 0.8% in July to $412,300, which snapped a five-month up streak but is 48.8% above the December 2019 level. That’s due to very limited supply.
New home sales up in July, while price is down from ’22
New homes sales rose 4.4% in July and are up 3% from the December 2019 level (slide 9). The median price rose 4.8% to $436,700. While it’s up 32.5% from the December 2019 level, supported by limited inventories of new and existing homes for sale, it’s down 8.7% from a year ago.
“House hostage situation” will likely persist
On slide 10, we show how the issues on the existing side are impacting new home activity. Many existing homeowners appear to be in a "house hostage situation,” not wanting to give up their sub-4% mortgage nor pay up the 50% premium for a 'used' house, which may also need upgrades or repairs. Accordingly, fewer are listing their home, imploding existing home inventory, which has now been below 1 million for the longest stretch since 1982. People’s behavior is seemingly saying, "if I must go through the hassle, I might as well get a new house or just stay put.“
Durable goods and core capital goods orders hit new highs
On slide 11, new orders for durable goods—big-ticket items such as equipment, machinery, electronics, and office furniture—fell 5.2% in July. The month-over-month decline was related to the massive 71% spike in commercial aircraft orders in June. New orders for core capital goods, which exclude the volatile aircraft and defense components, is -0.3% from the all-time high set in May.
Services barely expanding, manufacturing slump continues
On slide 12, the preliminary August readings for S&P Global U.S. Purchasing Managers Index (PMI) for services slipped to 51.0, the third straight monthly decline and the weakest reading in seven months. The U.S. manufacturing fell to 47.0, contracting for the 9th time in 10 months.
Revisions modestly lower ’22 strong job growth
On slide 13, we show the change in job growth by major industry group following the annual benchmark revisions. The preliminary estimate shows 306,000 fewer jobs were created during the March 2022 to March 2023 period, which was previously reported as 3.6 million total. Still, average job growth was about 300,000 per month over that span, which was well above the pre-pandemic 3-year average of 177,000.
Our take
We are keenly observing the current housing dynamics, which are being pushed by long-term demographics, a lack of housing stock, and ongoing regional migration and pulled by dramatically higher prices and mortgage rates. We have dubbed this the "house hostage situation,” whereby many homeowners are essentially trapped in their home by a sub-4% mortgage, not wanting to give up historically low rates, and unwilling to pay up the 50% premium to trade to another home, which is propping up both existing and new prices along with new home activity. Unfortunately, given the difficulty in changing those factors (such as the length of time to build a home, severe undersupply in some areas, etc.), the "house hostage situation” will largely persist for years, not months.
However, all eyes are on the Federal Reserve’s (Fed) Jackson Hole Economic Policy Symposium, which covers various monetary policy and economic topics. Chair Jay Powell was among many speakers, though most are academics. In his remarks, he reiterated that more rate hikes are possible, implicitly making the near-term rate cuts that some bond investors were projecting in ’24 seem less likely. That jives with our view that the Fed will keep rates higher for longer.
Powell also adamantly stated that 2% is – and will continue to be – the Fed’s inflation target, pushing back on those wanting a more flexible inflation goal. That said, Powell maintained maximum flexibility to do whatever it takes, adjusting as needed as the data evolves.
While some view Powell’s remarks as more hawkish, we take Chair Powell at his word that the Fed will “keep at it until the job is done,” which he has consistently said for more than a year.
Yet, the tension between stickier inflation, continued solid job growth, and generally slowing incoming economic data will play out within markets, not in the bucolic Jackson Hole backdrop. Interest rates are pushing higher as stocks are largely chopping sideways, trying to adjust to higher rates while digesting earnings reports. It also doesn’t help that markets are undertaking this tension during one of the lowest volume periods of the calendar historically, when many people are trying to squeeze in that last week of summer before Labor Day.
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 and the timing remains fluid.
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