This Week's State Of The Economy - What Is Ahead? - 24 May 2024

By: Taro Chellaram /Wells Fargo Economics & Financial Report/May 29, 2024

This Week's State Of The Economy - What Is Ahead? - 24 May 2024

This week’s economic data underscore how high interest rates are suppressing demand in the housing sector. Mortgage rates jetted higher in recent months as sticky inflation in the first quarter prompted a rise in rate expectations. According to Freddie Mac, the 30-year fixed rate steadily climbed from 6.6% in early February to over 7.0% in mid-April. Homebuying broadly retreated in response, giving way to declines in both new and existing home sales.

A slump in single-family demand prompted existing home sales to dip 1.9% in April. Although resales have still improved on balance this year, April capped off a two-month streak of declines that brought the sales pace 5.5% below the most recent peak in February. On the upside, resale supply has grown alongside the slower sales pace. Existing home inventories could sustain 3.4 months’ supply in April, up from 3.0 months in February. Supply remains tight overall, however, keeping price pressures firm. The median single-family resale price rose 5.6% year-over-year in April, the highest annual gain this year.

Meanwhile, new home sales notched a sharper-than-anticipated 4.7% drop over the month. Although builders have been fairly successful using sales incentives to stabilize demand, April’s downturn suggests that some builders may be struggling to offset the recent leg up in financing costs. Rising resale inventories may be another hurdle weighing on new home demand. That said, plentiful supply continues to be a tailwind for builders. New home inventories in April rose to their highest level since 2008, able to sustain 9.1 months of sales. Furthermore, builders surveyed by the NAHB stepped up their use of price cuts and mortgage rate buy-downs in May, which may help to bring buyers back from the sidelines.

Durable goods orders added a ray of sunshine to an otherwise gloomy data weak. Headline orders rose 0.7% in April, defying expectations for a decline. The now three-month streak of gains suggests that the manufacturing industry is on firmer footing today than it was late last year. High-tech manufacturing appears to be receiving a boost from the AI and automation craze, as the computers and electronics category is second only to motor vehicles and parts in terms of annual orders growth. Motor vehicle orders also appear to be back on track amid normalizing supply chains and inventory levels. Although not adjusted for inflation, autos and parts orders in April hovered 12.7% above their pre-pandemic peak.

We expect these interest-rate sensitive sectors will gradually improve as the Fed pivots to easing policy later this year. As discussed in Interest Rate Watch, Federal Reserve members stuck to their higher-for-longer messaging this week, emphasizing that they will not begin cutting rates until they are confident that inflation is on a path back toward target. Per the May meeting minutes, it is taking “longer than previously anticipated” for FOMC members to gain this confidence as the economy continues to exhibit momentum and inflation progress stalls. April's softer payroll print was a step in the right direction, but activity data out this week did little to allay concerns. First read of the May S&P global PMIs suggest that the economy is on track to expand at the fastest pace in 25 months. Not only did activity pick up across the manufacturing and services sectors, but manufacturers reported the steepest rise in input costs in one and a half years. We continue to expect the labor market will soften and inflation will grind lower as the year progresses, prompting the first rate cut in September. However, we acknowledge that risks are skewed toward greater economic resilience and a more drawn-out descent in price pressures.




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