Trend watch and what’s new this week
The activity-based data (slides 5 and 6) seemed to firm in the week following Labor Day. The travel-related indicators all improved week-over-week, including weekly air passenger counts, restaurant bookings, and hotel occupancy.
Back to office have ticked up again in the latest week (slide 7). Yet, there is wide variation based on industry and geography. Moreover, the decision appears to hinge on whether positions have customer-facing or not, with a growing tolerance for back-office workers with no customer interactions to work mostly or entirely remote.
Fed follows through with another supersized rate hike, more ahead
The Federal Reserve (Fed) raised interest rates by three-quarters of a point (0.75%), an unprecedented third straight supersized move. That said, the starting point of essentially zero was similarly extreme, only having occurred following the Great Financial Crisis (slide 8). Additionally, we show where the Fed expects the federal funds rate to be by year-end 2022—hike by another 1.25%—a big change from their view just three months ago. On slide 9, we show how dramatically the Fed has increased interest rates at the fastest pace in 42 years.
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 are now above 6.5% nationally. Of course, higher rates hurt housing affordability. In fact, Fed Chair Powell specifically called out housing as an area that they’d expect to see more weakness as a result of their aggressive rate hikes.
Existing home sales figures (slide 10) dropped for the seventh month in a row in August. Median prices fell for the third time this year. Prices continue to be supported by low inventories, which remain more than 25% below 2019 levels.
On slide 11, new building permits fell for the fourth time in five months. Also, new housing starts rose in August, but July was revised sharply lower. Single-family starts rose for just the third month in the past year.
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 2022, nearing the lows of the pandemic.
On slide 12, we show the Index of Leading Economic Indicators, which has dropped for six straight months. That is a recession red flag, which – at the very least – suggests continued slower growth ahead.
Lastly, on (slide 13), the preliminary September readings for S&P Global's U.S. PMI indices for manufacturing and services improved, snapping four-month and five-month decline streaks, respectively.
Much like his speech last month in Jackson Hole, Chair Powell remained straightforward and unambiguous in his messaging, leaving very little to interpretation. He was also clear-eyed in saying that slower economic growth to bring down unacceptably high inflation was the Fed’s objective, though without saying the word recession. He essentially acknowledged that a recession was likely, conceding that increased unemployment was a painful, but likely outcome.
One might equate this as Powell’s “whatever it takes” speech, similar to then-President of the European Central Bank Mario Draghi’s comments in July 2012 that marked the turnaround of the euro crisis. That said, Powell did maintain that the Fed’s actions weren’t on a preset course and that it would adjust its actions based on incoming data, regardless of the projections released this week.
Several other global central banks, including the Bank of England, also raised rates this week. Accordingly, global stock and bond markets had another tough week trying to digest both higher interest and the prospects for slower growth.
Aside from most of the travel-related indicators, much of incoming economic data is softening and is more broad-based. Unfortunately, the risk of a U.S. recession have risen substantially in the past few months. The silver lining is that the recent weakness might prove to be enough to hasten the recoil of prices and inflation without having to endure a prolonged downturn. For instance, the price of U.S. crude oil fell below $80 per barrel for the first time since early January. Whether a recession can be avoided or perhaps mild remains to be seen.
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