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   Brian Wesbury
Chief Economist
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   Bob Stein
Deputy Chief Economist
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  New Orders for Durable Goods Declined 6.6% in June
Posted Under: Data Watch • Durable Goods • Employment • GDP
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Implications:  Orders for durable goods plunged 6.6% in June, the largest monthly decline since the shutdown months of March and April 2020, as transportation orders plummeted.  However, the details in today’s report look better than the headline number suggests.  Transportation orders, particularly for aircraft, are very volatile month-to-month, and the outsized decline in June is very likely to swing and push orders positive in the months ahead.  Strip out the volatile transportation sector, and durable goods orders rose 0.5% in June, beating expectations with most major categories showing gains. Machinery orders led non-transportation orders higher, up 1.6% in June, while electrical equipment (1.3%), computers and electronic products (+0.8%), and fabricated metal products (+0.2%) also rose. Primary metals (-0.1%) were the lone other category to show a decline.  The most important number in the release, core shipments – a key input for business investment in the calculation of GDP – rose a modest 0.1% in June but declined at a 2.3% annualized rate in Q2 versus the Q1 average, the largest single-quarter decline since Q2 2020.  Shipments have moderated significantly since surging in late 2020 when PPP loans and stimulus payments flooded the system, and have now declined in two of the last three quarters.  While GDP readings continue to run positive (see here for today’s report on Q2 GDP), we expect the trend of turbulent readings to continue as the economy feels the lagged effects of the Federal Reserve’s tightening of monetary policy.  In other news this morning, initial claims for jobless benefits fell 10,000 last week to 235,000, while continuing claims fell by 9,000 to 1.851 million.  The figures are consistent with continued job gains in July, but at a slowing pace.

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Posted on Thursday, July 25, 2024 @ 10:09 AM • Post Link Print this post Printer Friendly
  Real GDP Increased at a 2.8% Annual Rate in Q2
Posted Under: Data Watch • GDP • Government • Inflation • Markets • Fed Reserve • Interest Rates • Bonds • Stocks
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Implications:  There are dark clouds on the horizon for the US economy, but the storm isn’t here yet.  Real GDP grew at a 2.8% annual rate in the second quarter, beating the consensus expected 2.0%.  Most of the growth was accounted for by an increase in consumer spending, which grew at a 2.3% rate.  The largest surprise was a hefty increase in business investment in equipment, which grew at an 11.6% pace (likely AI and chip related), the fastest pace in more than two years. We like to follow “core” GDP, which includes consumer spending, business fixed investment, and home building, while excluding government purchases, inventories, and international trade, the latter of which are very volatile from quarter to quarter.  Core GDP increased at a healthy 2.6% rate in Q2 and is up 2.9% from a year ago.  However, not all the news was good.  Net exports were a 0.7 percentage point drag on the growth rate as imports surged, partially due to some importers trying to get ahead of a possible dockworker strike later this year.  In turn, and likely related to the import surge, inventory accumulation added 0.8 percentage points to the real GDP growth rate and that’s unlikely to continue.  Meanwhile, inflation has not yet been fully tamed.  GDP prices rose at a 2.3% pace in Q2 but were up 2.6% from a year ago.  That’s progress from the 3.5% annual increase we were seeing a year ago, but still above the Federal Reserve’s 2.0% target.  Nominal GDP – real GDP growth plus inflation – increased at a 5.2% rate in Q2 but is still up 5.8% from a year ago.  Because of today’s numbers – moderate economic growth, decelerating inflation – many analysts and investors may think the economy is in the clear, without any trouble ahead.  By contrast, we believe the lags between monetary policy and the economy are long and variable and that the tighter monetary policy of the last couple of years has yet to have its full affect.

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Posted on Thursday, July 25, 2024 @ 9:59 AM • Post Link Print this post Printer Friendly
  New Single-Family Home Sales Declined 0.6% in June
Posted Under: Data Watch • Government • Home Sales • Housing • Inflation • Markets • Fed Reserve • Interest Rates
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Implications:  New home sales came in weaker than expected in June, posting another decline following the largest monthly drop since 2022.  It looks like activity is stuck in low gear, with sales having normalized roughly at the same pace they were in 2019 before COVID. With 30-year fixed mortgage rates still above 7%, some potential buyers may be delaying purchases in the hopes of widely expected rate cuts from the Federal Reserve improving affordability in the future. Assuming a 20% down payment, the rise in mortgage rates since the Federal Reserve began its current tightening cycle amounts to a 23% increase in monthly payments on a new 30-year mortgage for the median new home.  The good news for potential buyers is that the median sales price of new homes has fallen 9.3% from the peak in 2022. It does look like a small part of this decline reflects a lower price per square foot as developers cut prices.  The Census Bureau reports that from 2022 to 2023 (the most recent data available) the median price per square foot for single family homes sold fell 1.1%. While that decline is modest, it represents a stark reversal from the 45% gain from 2019 to 2022.  That said, most of the drop in median prices is likely due to the mix of homes on the market including more lower priced options as developers complete smaller properties. Supply has also put more downward pressure on median prices for new homes than existing homes.  The supply of completed single-family homes is up over 200% versus the bottom in 2022. Total inventories have continued to climb higher as well, hitting a new post-pandemic high in June. This contrasts with the market for existing homes which continues to struggle with an inventory problem, often due to the difficulty of convincing current homeowners to give up the low fixed-rate mortgages they locked-in during the pandemic.  Though not a recipe for a significant rebound, more inventories giving potential buyers a wider array of options will keep a floor under new home sales.  One problem with assessing housing activity is that the Federal Reserve held interest rates artificially low for more than a decade, and buyers started to believe those low rates were normal.  With rates now reflecting true economic fundamentals, the sticker shock on mortgage rates for potential buyers is very real.  However, we have had strong housing markets with rates at current levels in the past, and as long as the job market remains strong and buyers understand that the past was a mirage, it’s possible they will eventually adjust.  Finally, the Federal Reserve released monthly figures on the money supply yesterday showing M2 rose 0.3% in June and is up 1.0% in the past year.  After surging in the first two years of COVID, M2 declined from early 2022 through early 2023 and has since been close to flat.  As we mentioned in our recent MMO it looks like this is finally putting downward pressure on both inflation and the growth rate of nominal GDP.

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Posted on Wednesday, July 24, 2024 @ 1:53 PM • Post Link Print this post Printer Friendly
  A Mid-Convention Election Outlook
Posted Under: Video • Wesbury 101
Posted on Tuesday, July 23, 2024 @ 1:10 PM • Post Link Print this post Printer Friendly
  Existing Home Sales Declined 5.4% in June
Posted Under: Data Watch • Government • Home Sales • Housing • Markets • Fed Reserve • Interest Rates
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Implications:  The typically strong spring selling season failed to materialize in 2024, with activity falling 5.4% in June, the fourth decline in a row. It looks like the housing market remains stuck in low gear due to affordability. First, sales are still facing headwinds from mortgage rates that remain above 7% and some buyers are likely delaying purchases until after the Fed delivers on widely anticipated rate cuts. Second, home prices are rising again (hitting a new high in June) with the median price of an existing home up 4.1% from a year ago.  Assuming a 20% down payment, the rise in mortgage rates since the Federal Reserve began its current tightening cycle in March 2022 amounts to a 45% increase in monthly payments on a new 30-year mortgage for the median existing home.  Eventually, the housing market can adapt to these increases but continued volatility in financing costs will cause some indigestion. Notably, sales of homes priced at $1 million and above have risen 3.6% in the past year versus a decline of 5.4% for all existing home sales. This demonstrates that, at least at the higher end of the market, both buyers and sellers are beginning to adjust to the new reality of higher rates. However, outside the most expensive segment many existing homeowners remain reluctant to sell due to a “mortgage lock-in” phenomenon, after buying or refinancing at much lower rates before 2022.  This remains a major impediment to activity by limiting future existing sales (and inventories).  However, there are signs of progress with inventories rising 23.4% in the past year.  That has helped push the months’ supply of homes (how long it would take to sell existing inventory at the current very slow sales pace) up to 4.1 in June, the highest since May of 2020 although still below the benchmark of 5.0 that the National Association of Realtors uses to denote a normal market.   A tight inventory of existing homes means that while the pace of sales looks like 2008, we aren’t seeing that translate to a big decline in prices.  In other news on the manufacturing sector, the Richmond Fed index, a measure of factory activity in the mid-Atlantic, fell to -17 in July from -10 in June.

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Posted on Tuesday, July 23, 2024 @ 11:23 AM • Post Link Print this post Printer Friendly
  Moderate Growth in Q2
Posted Under: Employment • GDP • Government • Housing • Inflation • Markets • Monday Morning Outlook • Retail Sales • Trade • Fed Reserve • Interest Rates • Spending • Bonds • Stocks

There are signs US economic growth is slowing down.  In particular, jobless claims, perhaps the best high-frequency economic indicator, have averaged 235,000 per week in the last four weeks versus 211,000 in the first quarter.  Meanwhile, continuing jobless claims are creeping up while overall retail sales are up a meager 0.2% in the past six months, slower than the pace of inflation.

The US is not in a recession at this point but higher claims and soft sales, along with a renewed deceleration in inflation (consumer prices ticked down 0.1% in June), suggest that the drop in the M2 measure of the money supply from early 2022 through late 2023 is finally gaining traction.

We may also be witnessing the end of the temporary and artificial impact of last year’s surge in the budget deficit.  In the absence of the Supreme Court’s decision to overturn much of President’s Biden’s plan to forgive student loans, the budget deficit would have been 7.5% of GDP last year.  That’s well larger than any year on record when the US was not engaged in a World War and the unemployment rate was below 4.0%.

We estimate that Real GDP expanded at a 2.1% annual rate in the second quarter, mostly accounted for by an increase in consumer spending.  (This estimate is not yet set in stone; reports Wednesday about international trade and inventories might lead to an adjustment.)

Consumption: “Real” (inflation-adjusted) retail sales outside the auto sector grew at only a 0.3% annual rate in Q2 but auto sales rebounded at a 9.8% rate.  Meanwhile, it looks like real services, which makes up most of consumer spending, grew at a 2.1% pace.  Putting it all together, we estimate that real consumer spending on goods and services, combined, increased at a 2.1% rate, adding 1.4 points to the real GDP growth rate (2.1 times the consumption share of GDP, which is 68%, equals 1.4).

Business Investment:  We estimate a 1.7% growth rate for business investment, with gains in intellectual property leading the way, while commercial construction declined slightly.  A 1.7% growth rate would add 0.2 points to real GDP growth.  (1.7 times the 14% business investment share of GDP equals 0.2).

Home Building:  Residential construction grew in the second quarter in spite of some lingering pain from higher mortgage rates.  Home building looks like it grew at a 4.9% rate, which would add 0.2 points to real GDP growth.  (4.9 times the 4% residential construction share of GDP equals 0.2).

Government:  Only direct government purchases of goods and services (not transfer payments) count when calculating GDP.  We estimate these purchases were up at a 1.7% rate in Q2, which would add 0.3 points to the GDP growth rate (1.7 times the 17% government purchase share of GDP equals 0.3).

Trade:  Looks like the trade deficit expanded in Q2, as exports grew but imports grew much faster.  In government accounting, a larger trade deficit means slower growth, even if exports and imports both grew.  We’re projecting net exports will subtract 0.8 points from real GDP growth.

Inventories:  Inventory accumulation looks like it picked up in Q2 relative to Q1, translating into what we estimate will be a 0.8 point addition to the growth rate of real GDP.

Add it all up, and we get a 2.1% annual real GDP growth rate for the second quarter.  Good news compared to a recession but not a great starting point if a tighter monetary policy starts to bite harder.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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Posted on Monday, July 22, 2024 @ 11:22 AM • Post Link Print this post Printer Friendly
  Three on Thursday - High Frequency Data in the Post-COVID Economy
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In this week’s edition of “Three on Thursday,” we examine some key high-frequency data to see how things stand a few years after the COVID-19 shutdowns of 2020. Many believed that the world would be forever changed and that things would never return to their pre-pandemic state. However, the data show that the post-COVID world resembles the pre-COVID world in many ways.

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Posted on Thursday, July 18, 2024 @ 1:41 PM • Post Link Print this post Printer Friendly
  Industrial Production Increased 0.6% in June
Posted Under: Data Watch • Government • Industrial Production - Cap Utilization
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Implications:  Industrial production continued to beat expectations in June, rising for the second month in a row due to broad-based gains in every major category.  Manufacturing was the biggest positive contributor, rising 0.4%.  Looking at the details, auto production was the biggest contributor to June’s gain, jumping 1.6%. That said, non-auto manufacturing (which we think of as a “core” version of industrial production) also posted a gain of 0.2% in June. What’s interesting about today’s report is that it shows activity in manufacturing has been broadening recently. We have been highlighting the production of high-tech equipment in these reports, which is up at a 13.3% annual rate in the past three months, likely the result of investment in AI as well as the reshoring of semiconductor production. This is consistent with the broader post-COVID trend of consumer preferences shifting away from goods and towards services leaving capital goods as the driver of manufacturing activity.  However, the demand for consumer goods seems to be reviving of late, with manufacturing activity in that sector up at a healthy 10.3% annual rate in the past three months. Notably, this is the fastest three-month pace since early 2021 as lockdowns were still in full effect.  The mining sector was also a tailwind in June, with activity increasing 0.3%.  Gains in the production of oil and gas more than offset a slowdown in the drilling of new wells and the extraction of other minerals.  Finally, the utilities sector (which is volatile and largely dependent on weather) was also a source of strength in June, rising 2.8%.  Part of the recent strength in industrial production has been a surge in utilities demand, which is up at an unsustainable 39.2% annualized rate in the past three months due to warmer than normal temperatures driving demand for air conditioning which will normalize in the months ahead.

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Posted on Wednesday, July 17, 2024 @ 11:09 AM • Post Link Print this post Printer Friendly
  Housing Starts Rose 3.0% in June
Posted Under: Data Watch • Government • Housing • Markets • Fed Reserve • Interest Rates
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Implications:    Don’t get too excited about the jump in housing starts in June. Although they rebounded for the month, they remain below the pace of 2021-2023.  Moreover, the monthly rise was entirely due to a 19.6% jump in the volatile multi-family category, while single-family starts dropped to an eight-month low.  The good news for future homebuyers is that it looks like builders were focusing their efforts on completing projects in June, as completions surged 10.1% to a 1.710 million annual rate: the fastest pace since January 2007.  With strong completion activity and tepid growth in starts, the total number of homes under construction continues to fall, now down 6.9% through the first half of this year.  That is usually associated with a housing bust or recession.  The lack of construction is why home prices have remained elevated and are rising in most places while rents are still heading up in much of the country: we are building too few homes while lax enforcement of immigration laws mean rapid population growth.  We think government rules and regulations are likely the major hurdle for builders in much of the country, but home construction might also be facing headwinds from a low unemployment rate (which makes it hard to find workers) as well as relatively high mortgage rates.  Fitting the pattern, the NAHB Housing Index, a measure of homebuilder sentiment, fell to 42 in July from 43 in June.  A reading below 50 signals a greater number of builders view conditions as poor versus good.  No matter how you slice it, the home building sector seems strangely slow given our population growth and the ongoing need to scrap older homes due to disasters or for knockdowns, which is why we think government rules and regulations are likely a major problem.  However, there are some tailwinds for housing, as well.  For example, many owners of existing homes are hesitant to list their homes and give up fixed sub-3% mortgage rates, so many prospective buyers will need new builds.  In addition, Millennials are now the largest living generation in the US and have begun to enter the housing market in force, which represents a demographic tailwind for activity.  Putting it together, we don’t see housing as a major driver of economic growth in the near term, but we’re not expecting a housing bust like the 2000s on the way, either.  As the Fed eventually begins to cut rates, mortgage rates should trend lower as well, helping support housing later in 2024.

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Posted on Wednesday, July 17, 2024 @ 10:45 AM • Post Link Print this post Printer Friendly
  Retail Sales Were Unchanged in June
Posted Under: Data Watch • GDP • Inflation • Retail Sales
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Implications:   Soft, but stronger than expected.  The U.S. consumer closed out the second quarter on the weak side, with retail sales unchanged for the month and up only 2.3% versus a year ago.  However, prior months were revised higher and some of the softness in June itself was due to a 2.3% drop at auto dealers, likely stemming from cyberattacks that hit dealerships and which should help boost “pent-up” sales in July.  Excluding autos, sales rose 0.4% in June.  Looking at the details of the report, ten out of thirteen major categories rose in June, led by a 1.9% jump in sales at nonstore retailers (think internet and mail-order).  That was partially offset by a pullback in sales at gas stations as gasoline prices fell.  Stripping out gas along with the often-volatile categories for autos and building materials, “core” sales rose 0.7% in June and were up a robust 1.2% when including revisions.  Core sales – which are crucial for estimating GDP – were up at a 3.4% annualized rate in the second quarter versus the Q1 average, much better than the 0.7% annualized pace in the first quarter.  Meanwhile, sales at restaurants and bars – the only glimpse we get at services in the retail sales report – rose 0.3% in June while previous months activity were revised notably higher.  The initial 0.4% decline for that category in May was revised to a 0.4% gain (and prior months were revised higher as well).  Factoring in revisions, these sales were up 1.3% in June.  In the last twelve months, overall sales are up 2.3%, which has not kept up with inflation; “real” (inflation-adjusted) retail sales are down 0.9% in the last year and have remained stagnant for three years since peaking in April 2021.  This is consistent with our view of a slowing US economy as the lagged impacts from the drop in the M2 measure of the money supply from early 2022 through late 2023 take effect.  In other news this week, the Empire State Index, a measure of New York factory sentiment, declined to -6.6 in July from -6.0 in June.  On the trade front, import prices were unchanged in June while export prices declined 0.5%.  In the past year, import prices up 1.6% while export prices are up 0.7%.

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Posted on Tuesday, July 16, 2024 @ 11:08 AM • Post Link Print this post Printer Friendly

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