Trend watch
The weekly air passenger count increased by nearly a half million (498K) in the past 7 days, climbing to 19.7 million. Ho hum, another all-time record. At this pace, it might eclipse 20 million this coming week for the first time ever. Moreover, there’s still roughly two more months in the peak summer season, which historically crests during the week of Independence Day.
Similarly, most of the activity-based indicators (slides 5 and 6) improved in the past week, including the staffing index, which increased to an 11-week high.
What’s new this week
- 1Q24 growth revised modestly upward (slide 7).
- The Fed’s favorite inflation gauge continues cooling
(slide 8). - Big 4 indicators point toward continued growth for U.S. economy (slide 9). Updated following personal income and spending, along with revised industrial production figures.
- New home sales down 2 of past 4 months, and prices fell again in May (slide 10).
- New durable goods orders up in May, but core capital goods orders softened (slide 11).
- Consumer confidence revised upward but still at 6-month low, while inflation worries moderated (slide 12).
Our take
Recent economic data was nearly all positive. The exception remains continued lousy housing numbers; in this week’s case, it was awful new home sales in May. Increased incentives by builders – which caused lower new home prices in three of the past four months – just isn’t enough to entice homebuyers.
On the positive side, there were solid trends for personal income and spending, along with durable goods orders. Of course, it was also buttressed by the sizzling travel data. There were even cooler inflation data – both from the core personal consumption expenditures (PCE) price index as well as the inflation expectations components with the University of Michigan Monthly Consumer Sentiment Survey.
We believe that the implications of what sizzling travel data means for consumers is underappreciated by most investors. This is in response to the repeated drumbeat of pundits discussing the notion that “consumers are tapped out.”
That’s clearly not backed by the data. Most notably, there’s continued solid trends for retail sales (nominal or inflation-adjusted), activity-based activity such as the aforementioned travel data or other indicators, including ticket sales for live sporting events, concerts, movie box office, and theaters. Theme park attendance has reportedly been a bit softer recently, though might be impacted by record hot temperatures in many areas as well as recent ticket price increases.
The only “tapped out” evidence is that consumers have exhausted their excess savings, which is a nebulous academic calculation. Again, it’s not backed by the data, including money market fund balances, which remain more than $2.5 trillion higher than pre-pandemic levels. To be fair, that cash hoard tends to be concentrated within upper-income consumers.
However, the ease of accessing higher-yielding money market funds for most average Americans is equally underappreciated compared to prior cycles. For example, a simple online search shows many available options for higher-yielding accounts, most with very low minimum requirements (under $100). Moreover, nearly all banks and credit unions offer money market funds or higher-yielding accounts that can be easily accessed with just a few mouse clicks.
Lastly, we feel that the cooler inflation reading by core PCE is another data point supportive of a Fed rate cut. While it will take continued inflation progress (e.g., similar readings for June/July/Aug), the path is widening for a September Fed rate cut.
As we have repeatedly mentioned – 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.
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