This Week's State Of The Economy - What Is Ahead? - 21 June 2024

By: Taro Chellaram /Wells Fargo Economics & Financial Report/Jun 25, 2024

This Week's State Of The Economy - What Is Ahead? - 21 June 2024

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.

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