The data published this week were generally consistent with our view that momentum is fading in the U.S. economy. The week was replete with upside surprises, but in most cases, the positive headline numbers masked signs of moderation percolating beneath the surface. June retail sales garnered the most attention. On the one hand, control group sales rose solidly, which adds upside risk to our Q2 forecast for personal consumption expenditures and overall real GDP growth. On the other hand, the flat headline reading on retail sales was a reminder that consumer spending is gradually losing steam, a trend that is likely to continue.
In addition to higher interest costs, fewer savings and slowing income growth, a softer labor market is setting up to be the next challenge for the consumer. During the week ending July 13th, initial jobless claims shot up to 243K. Jobless claims are still relatively low, and the weekly increase may be explained by one-off factors such as planned summer shutdowns at auto plants. That said, both initial and continuing jobless claims have trended higher in recent months, which indicates that the pace of layoffs has risen and that finding a new job is becoming more difficult. All told, the labor market appears to be loosening up, which only adds credence to our view that growth is poised to moderate in the second half of the year.
A downshift in the residential sector is another sign that overall growth is easing. Total housing starts bested expectations and turned up during June. However, the upturn occurred largely as a result of a surge in multifamily starts, which overshadowed yet another decline in single-family construction. Until recently, builders' ability to lower prices and buy down rates has shielded single family construction from tighter monetary policy. But now higher rates finally appear to be restricting activity and single-family starts and permits have both weakened over the past several months. Similarly, the NAHB Housing Market Index slipped for the third consecutive month in July, which only adds to the evidence that builders are beginning to scale back production. The upturn in multifamily starts during June was notable in that it represents a potential green shoot for apartment and condo development, which has pulled back sharply over the past year alongside deteriorating apartment market fundamentals and tighter credit conditions. That noted, multifamily starts are highly volatile on a monthly basis, and it is too soon to say the segment is on the road to recovery.
Meanwhile, industrial production rose 0.6% during June, easily besting consensus expectations and marking the first two-month string of improvements for overall production since 2021. June's gain was widespread across major industry groups, with manufacturing, mining and utilities each rising solidly. On balance, industrial production has strengthened this year, and the level of industrial production has finally surpassed its prior peak for this cycle reached in September 2022. Although the recent improvements are encouraging, the factory sector still appears to be struggling under the weight of elevated interest rates. Zooming out, industrial production as a whole still has not fully returned to its peak in the prior cycle reached in September 2018.
The message delivered this week is economic activity, although still holding up, looks to be decelerating.The silver-lining is that financial markets now appear to be getting fully on board with the idea of the Federal Reserve initiating a rate-cutting cycle sooner rather than later. As we write in the Interest Rate Watch, the 10-year Treasury yield has edged lower recently alongside increasing odds of multiple cuts occurring this year. Market pricing is now closely aligned with our own forecast, which has the Fed starting off with a 25 bps reduction in September, another 25 bps cut in Q4 and 100 bps of easing throughout 2025. Less restrictive monetary policy should eventually help foster a stronger pace of growth, but in the meantime, the U.S. economy appears set to slow.
How Long Can US Businesses Remain Shut Down?
Wells Fargo Economics & Financial Report / Apr 29, 2020
The sudden stop in economic activity caused by the COVID-19 pandemic means that many businesses will need to rely on their cash reserves to survive the next few months.
This Week's State Of The Economy - What Is Ahead? - 13 May 2022
Wells Fargo Economics & Financial Report / May 18, 2022
While small business enthusiasm appears to have stalled, as owners are concerned about their ability to continue to pass on higher costs to consumers, cautious enthusiasm around rookie Jeremy Pena’s start persists.
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? - 21 February 2020
Wells Fargo Economics & Financial Report / Feb 22, 2020
Minutes from the January 28-29 FOMC meeting indicate the coronavirus will not push the Fed to cut interest rates, and for the most part housing and manufacturing survey data this week supported that view.
This Week's State Of The Economy - What Is Ahead? - 23 July 2021
Wells Fargo Economics & Financial Report / Jul 30, 2021
In the biggest financial news this week not connected to college football conference realignment, July\'s NAHB Housing Market Index slipped one point to 80.
This Week's State Of The Economy - What Is Ahead? - 15 November 2019
Wells Fargo Economics & Financial Report / Nov 16, 2019
Retail sales beat expectations and rose 0.3% in October, reflecting the ongoing strength of the consumer. Control group sales, a major input to GDP, also increased 0.3%.
This Week's State Of The Economy - What Is Ahead? - 03 May 2024
Wells Fargo Economics & Financial Report / May 10, 2024
The Federal Reserve can afford patience thanks to a resilient labor market. During April, total nonfarm payrolls rose by 175,000 net jobs, continuing a string of solid monthly payroll additions.
This Week's State Of The Economy - What Is Ahead? - 20 October 2023
Wells Fargo Economics & Financial Report / Oct 27, 2023
Treasury yields surged this week due to strong economic activity, impacting expectations for longer-term rates. New home sales led to a rise in single-family permits, but spiking mortgage rates are testing builder affordability strategies.
This Week's State Of The Economy - What Is Ahead? - 17 January 2025
Wells Fargo Economics & Financial Report / Jan 20, 2025
The Consumer Price Index ended the year at 2.9% year-over-year, which is a minor improvement from its 3.1% rate in January 2024 and points to stalled progress on the road back to the Federal Reserve\'s 2% inflation target.
This Week's State Of The Economy - What Is Ahead? - 24 March 2023
Wells Fargo Economics & Financial Report / Mar 29, 2023
The FOMC hiked the federal funds rate by 25 bps on Wednesday amid continued strength in the labor market and elevated inflation.
