Economic Data More Rice & Beans than Steak & Eggs
Markets chewed on an array of economic data this week, and what was served was mostly gristle. Starting off the week was May retail sales data, which were consistent with a gradual moderation in consumer spending. Retail sales rose just 0.1% over the month, falling short of consensus and suggesting that consumers may finally be feeling some spending fatigue. Downward revisions to past months’ data further support this development, but May’s print does somewhat overstate consumer weakness. Part of May’s weakness can be tied to declining goods prices, meaning “inflation-adjusted” sales were likely higher. On the other hand, consumer spending appears to be turning more selective, as we’ve seen growth in non-discretionary purchases begin to outpace discretionary. An example of that can be seen in flagging sales for restaurants, indicating softening in the leisure-side of the economy. Consumers are gradually losing their step, but we believe it will take further moderation in the labor market and in income growth to slow the pace of consumption.
A pop in industrial production provided a pleasant palate cleanser, but it came with an asterisk. Industrial production rose 0.9% over the month, besting market expectations. Strength was broad-based with each major sector expanding over the month, but it was a surge in manufacturing output that won the day. Although a favorable development for the industrial sector, it is likely not the beginning of a sustained upswing. High interest rates remain the primary headwind for the sector, and credit conditions remain restrictive overall. Uncertainty surrounding Fed policy, the upcoming U.S. election and the macro trajectory are also curbing capex intentions of many firms. Overall, headwinds in the sector remain prohibitive in the near-term, but future tailwinds stemming from the recent manufacturing construction boom and expected rate cuts later this year provide a source of optimism.
Markets also received a three-course housing market update with the release of housing starts, existing home sales and builder sentiment data. Weakness was broad-based across indicators as the housing sector remains rocked by higher interest rates. Total housing starts fell 5.5% in May to the slowest annualized pace in four years. The forward-looking permit activity was also soft, suggesting builders have become less optimistic about prospective demand given persistent inflation and the higher-for-longer interest rate environment. To that point, the NAHB Housing Market Index (HMI) fell a further two points in June to 43, the lowest reading since December 2023. Home builders have stepped up their usage of price cuts and incentives to attract buyers, but high mortgage rates and elevated financing costs continue to feed into overall builder pessimism.
Rounding third, existing home sales slipped 0.7% to a 4.11 million-unit pace in May. Tight inventory remains a challenge in the resale market, and the dearth of homes for sale is placing upward pressure on prices. The national median existing home price rose to an all-time high of $419,300 according to the National Association of Realtors. Prospective buyers are facing an affordability battle on two fronts, outflanked by rising home prices and high prevailing mortgage rates. According to the NAR, “the mortgage payment for a typical home today is more than double that of homes purchased before 2020." Rising supply should help bring some relief on the price front, but we do not see a meaningful rebound in home sales until the Fed initiates a rate cutting cycle, which we look for later this year.
The Leading Economic Index continued its long descent, falling 0.5% in May. The LEI is now just a touch above its pandemic low, at odds with an economy that continues to expand. Consumer expectations and the new orders component of the ISM manufacturing index together pulled the LEI's monthly change down 0.4 percentage points. A recent rally in stock prices and an increase in working hours helped soften the blow, but by and large the LEI continues to wave a red flag. Despite this week’s parade of disappointing data, much of it was concentrated in interest-rate sensitive sectors, and the wider economy remains healthy on balance even as softening becomes increasingly evident.
This Week's State Of The Economy - What Is Ahead? - 09 April 2020
Wells Fargo Economics & Financial Report / Apr 10, 2020
The Federal Reserve announced a series of measures this morning that are intended to assist households, businesses and state & local governments as they cope with the economic fallout of the COVID-19 outbreak.
This Week's State Of The Economy - What Is Ahead? - 19 July 2024
Wells Fargo Economics & Financial Report / Jul 22, 2024
Retail sales, housing starts and industrial production all surprised to the upside this week.
This Week's State Of The Economy - What Is Ahead? - 11 September 2020
Wells Fargo Economics & Financial Report / Sep 14, 2020
In the holiday-shortened week, analysts’ attention remained on the progress of the labor market. Recent jobless claims data remain stubbornly high and point to a slowing jobs rebound.
This Week's State Of The Economy - What Is Ahead? - 30 July 2021
Wells Fargo Economics & Financial Report / Aug 11, 2021
Despite a few misses on the headline numbers, economic data this week highlighted a theme of demand continuing to outstrip supply and ongoing slack in the labor market.
This Week's State Of The Economy - What Is Ahead? - 17 January 2020
Wells Fargo Economics & Financial Report / Jan 18, 2020
Mild weather helped housing starts surge 16.9% in December to a 1.61 million-unit pace, the highest in 13 years. Manufacturing surveys from the New York Fed and Philadelphia Fed both rose more than expected in December.
This Week's State Of The Economy - What Is Ahead? - 18 September 2020
Wells Fargo Economics & Financial Report / Sep 15, 2020
The details were generally more favorable. The retail sectors hurt most by the pandemic saw gains in August, factory output is growing and soaring homebuilder confidence suggests soft construction data this week may be transitory.
This Week's State Of The Economy - What Is Ahead? - 26August 2022
Wells Fargo Economics & Financial Report / Aug 29, 2022
I can understand how the opportunity to participate in lots of scintillating economic policy discussions could make fishing look exciting in comparison.
This Week's State Of The Economy - What Is Ahead? - 22 July 2022
Wells Fargo Economics & Financial Report / Jul 27, 2022
July\'s NAHB Housing Market Index dropped 12 points to 55, the second largest monthly decline on record behind April 2020\'s pandemic-induced collapse.
This Week's State Of The Economy - What Is Ahead? - 08 May 2020
Wells Fargo Economics & Financial Report / May 15, 2020
April nonfarm payrolls confirmed what we already knew—the labor market is collapsing. By the survey week of April 12, net employment had fallen by 20,500,000 jobs.
This Week's State Of The Economy - What Is Ahead? - 13 October 2023
Wells Fargo Economics & Financial Report / Oct 13, 2023
The Consumer Price Index (CPI) rose 0.4% in September, a monthly change that was a bit softer than the 0.6% increase registered in August. The core CPI rose 0.3% during the month, a pace unchanged from the month prior.
