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.
This Week's State Of The Economy - What Is Ahead? - 01 July 2022
Wells Fargo Economics & Financial Report / Jul 14, 2022
As with the Mets and Yankees when they ran into the Astros over the last couple days, consumers staying power is showing signs of running out as inflation persists and confidence moves sharply lower.
This Week's State Of The Economy - What Is Ahead? - 22 May 2020
Wells Fargo Economics & Financial Report / May 25, 2020
The re-opening of the country is getting underway, with all 50 states starting to roll back restrictions.
This Week's State Of The Economy - What Is Ahead? - 09 September 2022
Wells Fargo Economics & Financial Report / Sep 10, 2022
The ISM services index came in stronger than expected, and the underlying details pointed to service sector resilience with business activity and new orders notching their highest reading this year.
This Week's State Of The Economy - What Is Ahead? - 13 March 2020
Wells Fargo Economics & Financial Report / Mar 14, 2020
Financial conditions tightened sharply this week as concerns over the coronavirus and the economic fallout of containment efforts mounted.
This Week's State Of The Economy - What Is Ahead? - 24 January 2020
Wells Fargo Economics & Financial Report / Jan 25, 2020
Fears of an escalating coronavirus outbreak reached the United States this week, as a Washington state man became the first confirmed domestic case and the international total reached more than 800.
This Week's State Of The Economy - What Is Ahead? - 08 November 2019
Wells Fargo Economics & Financial Report / Nov 09, 2019
Optimism soared this week on hopes of a forthcoming trade deal, as equity markets hit all-time highs and the yield curve steepened.
28 January 2021 Economic Outlook Report
Wells Fargo Economics & Financial Report / Feb 08, 2021
In our recently released second report in this series of economic risks, we focused on the potential of demand-side factors to lead to significantly higher U.S. inflation in the next few years.
This Week's State Of The Economy - What Is Ahead? - 10 September 2021
Wells Fargo Economics & Financial Report / Sep 13, 2021
Data from the opening weekend of College Football indicates that we will have to endure another season of Nick Saban deification.
This Week's State Of The Economy - What Is Ahead? - 08 October 2021
Wells Fargo Economics & Financial Report / Oct 15, 2021
September\'s disappointing employment report clearly takes center stage over this week\'s other economic reports. Nonfarm employment rose by just 194,000 jobs, as employers continue to have trouble finding the workers they need.
This Week's State Of The Economy - What Is Ahead? - 18 October 2019
Wells Fargo Economics & Financial Report / Oct 19, 2019
Personal consumption is still on track for a solid Q3, but retail sales declined in September for the first time in seven months.
