Economic Data Tracker – 
Summer travel sizzles, while inflation cooled in May

Trend watch

U.S. air travel continues to fly as weekly passenger count climbed to 19.0 million, the highest 7-day tally ever. Based on historical patterns, it should continue to increase for the next two weeks before reaching its cruising altitude during the week of Independence Day. After the third week of July, it typically begins to slowly descend through the week of Labor Day.

Similarly, most of the activity-based indicators (slides 5 and 6) – including rail traffic, back to office, and hotel occupancy – rebounded in the week following Memorial Day, which is the typical pattern. In fact, hotel occupancy booked its best week since July 2023. 

What’s new this week

• Consumer inflation cooler than expected in May (slide 7).
• Consumer inflation: Food and energy well behaved in recent months (slide 8).
• Key pieces of core inflation cooling – shelter, medical services, vehicles (slide 9). A quick look at the key components of core consumer inflation. 
• Wholesale prices fell for 2nd time in 3 months as energy prices declined (slide 10).
• Monthly and annual pace of rents now running below pre-COVID trend (slide 11).
• Consumer confidence slumped to 7-month low, but inflation outlook steady (slide 12). 

Our take

At its June rate-setting meeting this week, the Federal Open Market Committee (FOMC) kept the federal funds rate unchanged (target range of 5.25% to 5.50%). Within the committee’s quarterly economic projections, Fed officials now see modestly higher inflation this year and next year compared to their March projections. Also, the FOMC sees the unemployment rate moving a touch higher next year. More importantly, the so-called ‘dot plot’ suggests two fewer rate cuts this year while adding one more to next year.

Yet, based on those same dots, it would only take a couple participants to change their mind to shift the median to two rate cuts this year.

Chair Powell was very noncommittal during the post-meeting press conference. While we didn’t expect him to outline exactly when rate cuts would occur, this meeting and the committee’s economic projections spurred more questions than answers for us. Most prominently, the June Fed meeting seemed to further muddle the timing of when a rate cut would come in 2024.

Like many folks, the Fed appears have been spooked by the reacceleration of inflation during the first quarter. As slides 7-11 show, inflation clearly cooled in May. While May was a good start, it sounds like the Fed needs several more months of cooling inflation before the first rate cut of this cycle. That makes sense insofar as, if the Fed lowers rates, it doesn’t want to have to change directions if inflation flares up again later this year. 

Regardless of Fed’s messaging, we maintain our belief that progress on inflation should allow for at least one rate cut before the end of the year. We’d highlight slide 11, which indicates that rents are now running below the pre-pandemic trend both on a monthly and annual basis. That is key to the path of inflation given the importance of housing within the core inflation readings that the Fed relies upon.

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, especially lower-end consumers. While it sounds a bit counterintuitive, with housing supply being the stickiest part of inflation currently, a couple cuts get a 30-year fixed mortgage in the high-6% range rather than the current low/mid-7%. That would keep the economy humming for several more years without a whole lot of additional effort.

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 several 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.