Economic growth defied expectations in the second quarter. Real GDP expanded at a 2.8% annualized rate, a sizable acceleration from 1.4% in Q1. Such a strong outturn can be a bit head-scratching when stacked up against the broader signs of economic deceleration that we have written about over the past few months. However, the underlying details revealed familiar signs of waning momentum. Aside from a boost from inventories, consumer spending and business equipment investment were the primary drivers of Q2’s robust showing. Each of these was specifically propelled by sturdy spending on autos. Elsewhere, we saw a contraction in industrial equipment outlays and additional evidence that consumers are pivoting away from recreation in favor of essential purchases like housing and healthcare. Meanwhile, the lagged effects of monetary tightening pulled real estate investment into the red, causing outright declines in both residential and structures spending.
Although we saw a glimpse of it in the Q2 GDP release, this morning we received the full details describing consumer income and spending in the month of June. Real consumer spending rose 0.2% over the month. Although a step down from May's 0.4% upturn, spending on services is still too hot for comfort. Real services outlays in June advanced at the fastest pace in four months. As consumers pull back on credit usage, income growth remains the most significant factor sustaining spending. Real disposable personal income rose 0.1% in June, slower than May’s 0.3% surge but still indicative of expanding purchasing power.
Yet, the Fed’s preferred inflation gauge demonstrated additional incremental softening. The headline PCE deflator rose just 0.1% in June. Details were encouraging all around. Goods prices outright declined for the second straight month, while services prices did not show signs of acceleration. The core deflator remained sturdier at 0.2%, but June brought the second-lowest print this year. Core PCE is now running at a 2.3% three-month annualized rate, another step closer to that elusive 2.0%.
No matter how resilient the broader economy appears, cracks are still materializing across interest-rate sensitive sectors. The housing market is clearly caught in the crossfire. This week, we learned that both new and existing home sales softened in June. Elevated rate expectations amid the Fed’s ongoing fight against inflation have kept mortgage rates close to 7.0% for most of the year, discouraging would-be buyers. Resales in June slid 5.4% to the slowest pace in six months, nearly retreating to the prior cycle low reached in October 2023. As inventories climb higher on the slower sales pace, weak demand has become a greater burden on the resale market than low supply. Existing home prices rose at a 4.1% annual rate in June, keeping buyers caught between rising prices and elevated mortgage rates.
Demand for new construction also appears to be losing steam. New home sales slipped a more modest 0.6% in June. That said, this print was weaker than expected and brought the pace of new home sales to its lowest point since last November. Despite increased use of incentives, builders report that buyer traffic has waned as expectations for lower rates later this year keep buyers in wait-and-see mode. Developers have pulled back on single-family building in response, mirroring dips in buyer traffic and builder confidence. Plentiful new home inventories are also discouraging development. The count of new homes for sale rose for the third consecutive month in June, amounting to 9.3 months’ supply at the current sales pace.
You wouldn’t know it from Q2’s equipment spending print, but the manufacturing sector continues to struggle in the weak demand environment. Durable goods orders plunged 6.6% in June, the sharpest monthly drop since 2020. Although June’s downturn overstates recent weakness, it is indicative of the broader flatlining in manufacturing activity that has emerged against a backdrop of higher financing costs. Driving June’s miss was a 130% collapse in nondefense aircraft orders. Orders excluding transportation actually posted a slight 0.5% improvement. Looking ahead, uncertainty around the election and its implications for interest deductibility and capital investment expensing will likely limit the scope for a manufacturing rebound heading into November.
This Week's State Of The Economy - What Is Ahead? - 23 February 2024
Wells Fargo Economics & Financial Report / Feb 27, 2024
Stronger-than-expected inflation, underpinned by the mildly hawkish minutes from the January FOMC meeting, drove a move higher in mortgage rates.
This Week's State Of The Economy - What Is Ahead? - 09 April 2021
Wells Fargo Economics & Financial Report / Apr 10, 2021
This week\'s economic data kicked of with a bang. The ISM Services Index jumped more than eight points to 63.7, signaling the fastest pace of expansion in the index\'s 24-year history.
This Week's State Of The Economy - What Is Ahead? - 16 April 2021
Wells Fargo Economics & Financial Report / Apr 17, 2021
Data released this week continue to show that the economic recovery has gained momentum in March. The much anticipated consumer boom has arrived.
This Week's State Of The Economy - What Is Ahead? - 02 April 2021
Wells Fargo Economics & Financial Report / Apr 08, 2021
Increased vaccinations and an improving public health position led to an easing of restrictions and pickup in activity across the country in March.
This Week's State Of The Economy - What Is Ahead? - 27 September 2019
Wells Fargo Economics & Financial Report / Sep 28, 2019
The release of the transcript of President Trump\'s phone conversation with Ukraine President Volodymyr Zelenskiy and the whistle blower complaint overshadowed most of this week\'s economic reports and took bond yields modestly lower.
This Week's State Of The Economy - What Is Ahead? - 23 April 2021
Wells Fargo Economics & Financial Report / Apr 26, 2021
This week\'s lighter economic calendar allowed forecasters more time to assess the implications from the prior week\'s blowout retail sales report.
This Week's State Of The Economy - What Is Ahead? - 21 June 2024
Wells Fargo Economics & Financial Report / Jun 25, 2024
Retail sales rose just 0.1% over the month, falling short of consensus and suggesting that consumers may finally be feeling some spending fatigue.
This Week's State Of The Economy - What Is Ahead? - 07 April 2023
Wells Fargo Economics & Financial Report / Apr 10, 2023
Employers added jobs at the slowest pace since 2020 in March, job openings fell and an upward trend in initial jobless claims has emerged.
This Week's State Of The Economy - What Is Ahead? - 23 October 2020
Wells Fargo Economics & Financial Report / Oct 24, 2020
A recent strong report from the National Association of Homebuilders set the tone for another round of strong housing data. The NAHB index rose two points to a record high 85.
This Week's State Of The Economy - What Is Ahead? - 03 November 2023
Wells Fargo Economics & Financial Report / Nov 08, 2023
Although payroll growth is easing, the labor market remains relatively tight. The unemployment rate inched up to 3.9% in October, slightly higher than the cycle low of 3.4% first hit in January 2023, but still low compared to historical averages.
