Economic Data Tracker – 
Consumer remains resilient, but single-family housing slump continues

Trend watch

A massive cybersecurity outage – a software glitch rather than a cyberattack – has disrupted the global digital infrastructure. Among the fallout were millions of air passengers stranded around the world. This will take a few days to recover from and will likely ripple through many of the activity-based indicators (slides 5 and 6), though the impacts from Hurricane Beryl are also still doing so. For instance, weekly jobless claims jumped 9% this past week; nearly 60% were in Texas, where Beryl made landfall and crippled Houston and southeast Texas.

Since we’re discussing air passengers, we noted two weeks ago that it was very likely that the U.S. daily passenger count would surpass 3 million, which had never previously happened. The U.S. cruised to 3.01 million on July 7^th, the Sunday following the Independence Day holiday. On a weekly basis, the U.S. has now exceeded 19 million – which had also never happened – in four of the past six weeks. 

What’s new this week

• Retail sales hovering near all-time high despite pullback in autos & gasoline (slide 7).
• New housing activity: single-family slid further in June, but multi-family up (slide 8).
• Industrial production climbed as automotive production jumped to new high (slide 9).
• Freight volumes at 3 key ports running above ’23 and pre-pandemic pace (slide 10). 

Our take

We are encouraged by another round of solid economic data, including near all-time high retail sales and solid industrial production trends, which were coupled with the aforementioned robust air passenger figures. Surpassing 19 million in four of the past six weeks is unprecedented. While air travel does skew towards high-income consumer and includes foreign travelers, such robust figures indicate a broader swathe of consumers. Additionally, there were the strong freight volume trends.

However, single-family housing remains challenged, impaired by both high home prices and the highest mortgage rates in more than a generation. Alas, new housing starts and building permits continued to slide, declining for a fourth and fifth straight month, respectively.

On the existing single-family home side, the “house hostage situation” has continued – whereby many homeowners are essentially  trapped in their home by the double-whammy of sub-4% mortgage rates that many people locked-in during the decade from 2012 to mid-2022 along with existing home prices that are up an eye-popping 53.2% since December 2019.

While the tremendous home price appreciation does create a significant wealth effect, it doesn’t incent people to sell their existing home unless they’re essentially forced to by a life event (e.g., job move, divorce, death, more people, lack of space, etc.), further depressing the number of existing homes for sale.

With a limited number of homes for sale, the lack of supply has further boosted prices for both existing and new homes. It has also reinforced the demand for multi-family housing. Yet, higher interest rates have equally impacted the multi-family builders. In fact, permits for new multi-family units are down 23.4% from a year ago.

While it sounds a bit counterintuitive, with housing supply being the stickiest part of inflation currently, a couple interest rate cuts would get a 30-year fixed mortgage in the mid/high-6% range rather than the current low-7% rates. Although mortgage rates aren’t the only issue, lowering rates would help with the logjam of existing home supply.

That is among the reasons why we expect the Federal Reserve (Fed) to cut rates, perhaps in September, to alleviate the housing issues.

To be clear: we don’t think the economy “needs” cuts to avoid a recession. The U.S. economy is cooling compared to 2023 but isn’t weak. That said, we believe that interest rates are restrictive for rate sensitive parts of the economy, such as housing.

Bottom line

We maintain our view that the U.S. economy is cooling but not weak. That keeps the Fed in a holding pattern for the next couple months, awaiting more cooling by inflation data. Thus, we maintain our belief that progress on inflation should allow for at least one rate cut before the end of the year.