Trend watch and what’s new this week
The activity-based data (slides 5 and 6) has firmed for several weeks after a mild slump in late September through mid-October. We attributed most of that softness to typical seasonality, which pulls activity lower as the weather cools and outdoor activities taper. To wit, hotel occupancy, air passenger counts, and dining reservations have improved in past few weeks.
Inflation cooled in October, but still a long way to go for prices
We continue to see evidence that inflation has peaked. Wholesale inflation readings, known as producer prices (slide 7), rose 0.2% month-over-month in October, the same as September. On a year-over-year basis, it increased 8.0%, down substantially from 11.7% in March. The pace of core PPI, which excludes food & energy, held steady (no change) for the month and increased 6.7% YoY compared to 9.7% in March. Of course, wholesale prices eventually work their way into consumer prices.
On slide 8, rental price growth—from a different data source—has continued to moderate on a month-over-month basis. It rose 0.3% in October. That is the slowest pace in 24 months and is below the pre-pandemic pace of 0.5% per month. Also, the pace declined for the fourth month in a row and the 11th time in the past 14 months.
More weakness within housing
Several key housing metrics were released this week, nearly all of which continued to weaken. We attribute all of this to dramatically higher mortgage rates, which have surged nationally throughout 2022. Of course, higher rates hurt housing affordability.
Existing home sales (slide 9) dropped for the ninth straight month and the tenth time in 11 months. Meanwhile, prices fell for the fourth month in row. Still, prices aren’t falling as much as you’d might guess as they continue to be supported by low inventories, which remain more than 30% below 2019 average.
On slide 10, new building permits dropped 2.4% MoM, helped by multi-family, which are up 11.2% MoM. However, single family permits dropped for the eighth straight month in October. Also, new housing starts dropped in October with single family down for the 9th time in 11 months. 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.
Weakness elsewhere, too
On slide 11, we show the Index of Leading Economic Indicators, which dropped in October. It’s down eight straight months and 9 out of 10.
Our work shows that over the past eight recessions, on average, the LEI has peaked about 12 months before the onset of recession, with varied lead times. It peaked at 119.4 back in February.
Additionally, the LEI dropping more than 2.5% year over year has typically coincided with the start of a recession, though it has occasionally preceded it by as many as 5 months. Thus, timing wise, the start of the recession is very likely sooner rather than later.
On slide 12, we show a key metric within the freight gauges, unit volumes of shipping containers, which dropped again in October. It was the fifth straight MoM decline and it’s under the long-term trend. Similar, another key freight metric has declined in four of the past five months, though it remains above its long-term trend. Nonetheless, the sharp pullback in freight is not a good sign for overall economic growth
Consumer still spending despite rising prices
On slide 13, we show retail & food sales, which jumped 1.3% in October, the largest increase in eight months and hit a new all-time high. Gasoline and auto sales, which together comprise almost a third of total sales, were up sharply for the month. Excluding both, sales hit a new all-time high. Food service and drinking establishments sales also rose 1.6%. We would warn, however, that retail sales have historically been an unreliable recession indicator.
The good news is that we are fairly confident in our view the inflation has peaked, barring some massive unforeseen supply shock, such as a repeat of the Russia-Ukraine War. Moreover, it appears likely that inflationary pressures are easing enough to allow the Federal Reserve (Fed) decision-makers to throttle down on the aggressiveness after four straight meetings with supersized rate hikes of 0.75%.
The bad news is, as we have noted here recently, prices probably aren’t fading enough to convince the Fed to stop hiking interest rates, which is the so-called pivot some investors are clamoring about. That is especially true given labor market conditions, which are cooling but remain solid, including weekly jobless claims that really haven’t budged in recent months.
While there are several more inflation data points, including inflation expectations, we think that the Fed will hike by 0.50% at their meeting on December 14 based on how the current data is trending.
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