Economic Data Tracker – 
U.S. travel continues to surge, while housing activity tumbled in May

Trend watch

Stop me if you’ve heard this before: U.S. air travel set a fresh weekly passenger count record, climbing to 19.2 million in the past 7 days. Its up 7.1% year to date compared to the same period in 2019. This bodes well  since there’s still two-and-half months in the peak summer season, which historically crests during the week of Independence Day.

Similarly, hotel occupancy is already hitting mid-summer rates. Otherwise, most of the activity-based indicators (slides 5 and 6) improved in the past week.

We’re concerned about the impact of the so-called heat dome, as strong high-pressure atmospheric conditions cause sweltering temperatures in the eastern U.S. In addition to heat-related deaths, the heat dome has caused pavement to buckle and warp in several areas.  

What’s new this week

• Retail sales hovering near all-time high (slide 7).
• Existing home sales down for third month in May, but prices jump to all-time high due to lack of supply (slide 8).
• New housing activity tumbled in May (slide 9).
• SPG’s manufacturing and services indices continue to expand in June (slide 10).
• Industrial production climbs as automotive production nears all-time high (slide 11).
• CEO Economic Outlook Survey ebbed from 7-quarter high (slide 12).
• Leading indicators continue 2-year slump in May, but annual change improved again (slide 13). 

Our take

It was the best of times for travel and retail sales figures in May. Even some of manufacturing data – which has been sluggish in the past year – joined the party in May. Yet it was the worst of times for housing in May. New housing starts and building permits continued to slide, while existing sales declined for a third straight month. Moreover, existing home prices surged to an all-time high as the “house hostage situation” has continued. 

The “house hostage situation” – whereby many homeowners are seemingly 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 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. Given the weighting of shelter, which is more than 35% of the total Consumer Price Index (CPI) and nearly 45% of core CPI (which excludes food & energy), housing has been a significant driver of inflation.

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 high-6% range rather than the current low/mid-7%. Although mortgage rates aren’t the only issue, lowering rates would help with the logjam of existing home supply.

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. 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.