We live in unprecedented times. Since the COVID pandemic, the economy has been deeply influenced by a massive increase in government spending, COVID-related shutdowns, and a huge increase in the money supply.  In all our years of economic forecasting, the task of identifying where we are and where we are heading has never been so difficult.  Now more than ever, it is important to follow real-time data on the economy. The charts in the High Frequency Data Tracker follow data that are published either weekly or daily, providing a check on the health of the US economy. 

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Implications:   Income and spending rose in April as consumers continue to navigate elevated inflation and an uncertain path ahead.  The best news in today’s report was that incomes rose 0.4% and are up 5.4% in the last year, led by gains in private-sector wages & salaries (+0.5% for the month and up 5.6% year-to-year).  Those would be great numbers in a normal low-inflation environment, but the fiscal and monetary mistakes made since COVID have led to persistently high inflation that has taken a big bite out of that spending power, with real (inflation-adjusted) incomes up just 1.0% in the last year.  In spite of lackluster real income gains, consumer spending rose a rapid 0.8%, led by spending on services.  Spending on goods also rose in April after monthly declines in the two months prior, but in the last year, spending on services is up 8.4% while goods spending is up 3.6%.  This transition from goods toward services has been an ongoing theme in the past year.  Given the surge in goods activity during COVID as many services were shut down, we expect goods spending will struggle to keep pace as the economy continues to shift back towards a more “normal” mix of activity.  On the inflation front, PCE prices – the Federal Reserve’s preferred measure of prices – rose 0.4% in April, pushing the twelve-month comparison up to 4.4% from 4.2% in March.  PCE inflation has been coming down on a year-to-year basis since it peaked at 7.0% last June, but this shouldn’t make the Fed sanguine on inflation.  “Core” inflation, which excludes food and energy is up 4.7% on a year ago comparison basis and down less than a percentage point from the 5.4% peak in core inflation last February.  In other words, this has been a slow slog lower.  While goods prices have been moderating (up 2.1% from a year ago versus 10.6% back in June of last year), service inflation remains stubbornly high and has shown little sign of easing (up 5.5% from a year ago versus 5.1% back in June).  Note that the Fed is now closely watching a subset of inflation dubbed the “Super Core,” which is services only (no goods), excluding food, energy, and housing.  That measure rose 0.4% in April and is up 4.5% versus a year ago. Inflation continues to take a toll on the economy, which is also feeling more of the effect of the slowdown in the money supply over the past year.  The economy was still growing in April, but we think tougher times are ahead.

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Implications:   New orders for durable goods rose 1.1% in April, easily beating the consensus expectation for a decline.  However, when you look past the headline, there isn’t a whole lot to like in the April report.  The increase in orders was due to the typically volatile defense aircraft category, which jumped 5.5% in April after declines over the prior two months.  Stripping out transportation, orders slipped 0.2% in April with declines across most major categories.  Diving into the details shows that a 1.0% rise in machinery orders was more than offset by declines in computer and electronic products (-1.4%), electrical equipment (-1.0%), and primary metals (-0.5%), while fabricated metal product orders showed no change.  One piece of positive news in today’s report was that core shipments – a key input for business investment in the calculation of GDP – rose 0.5% in April and, if unchanged in May and June, would be up at a 1.2% annualized rate in the second quarter versus the Q1 average.  While still positive in Q2, that would be the fifth consecutive quarterly deceleration in the pace of growth, and would represent the weakest quarter since the shutdown-restricted second quarter of 2020.  In the past year, orders for durable goods are up 4.2%, while orders excluding transportation are down 0.2%.  But when you consider that producer prices for capital equipment are up 5.5% in the past year, it means that while headline orders are still rising in dollar terms, they are declining when adjusted for inflation.   A number of factors are likely to generate turbulent footing as we continue further into 2023: a tighter Federal Reserve, the tightening of lending standards following stress in the banking sector, and withdrawal symptoms following the COVID-era economic morphine that artificially boosted both consumer and business spending.  In addition, the return toward services means a large portion of goods-related activity will soften in the year ahead, even as some durables that facilitate services recover.  While the data to-date suggests the economy is still growing modestly in the second quarter, we believe a recession awaits us later this year or early in 2024.  In recent news on the housing front, pending home sales, which are contracts on existing homes, were unchanged in April after a 5.2% decline in March.  Plugging these figures into our model suggests existing homes will be roughly flat in May.

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Implications:  Real GDP was revised higher for the first quarter to a 1.3% annual rate from a prior estimate of 1.1%.  The upward revision to the overall number was due to the cumulative effect of a series of small upward revisions to inventories, business investment, consumer spending, and government More important, today we also received our first look at economy-wide corporate profits for the first quarter, which declined 5.1% versus Q4, and are down 2.8% from a year ago.  The government includes Federal Reserve profits in this data, and the Fed is making losses.  So, we follow profits excluding those earned (or lost) by the Fed, which are still up 7.0% from a year ago.  However, profits excluding the Fed declined 2.7% in Q1, the largest drop for any quarter since 2020. Excluding the Fed, domestic non-financial companies’ profits fell the most.  Moving forward, we expect further declines in corporate profits as the economy continues to re-normalize after the massive fiscal and monetary stimulus of 2020-21.  In turn, this will be a headwind for equities.  In addition to corporate profits, we also got a Q1 total for Real Gross Domestic Income, an alternative to GDP that is just as accurate.  Real GDI fell at a 2.3% annual rate in Q1 and is down 0.9% versus a year ago, consistent with underlying economic weakness. These are figures that are normally seen in and around recessions. Regarding monetary policy, inflation remains stubbornly high.  GDP inflation was revised higher to a 4.2% annual rate in Q1 versus a prior estimate of 4.0%.  GDP prices are up 5.3% from a year ago, nowhere near the Fed’s 2.0% target.  Meanwhile, nominal GDP (real GDP growth plus inflation) rose at a 5.4% annual rate in Q1 and is up 7.1% from a year ago.  In employment news this morning, initial claims for jobless benefits rose 4,000 last week to 229,000.  Continuing claims declined 5,000 to 1.794 million. As for other economy-wide news, the Fed recently reported that the M2 measure of the money supply dropped 0.8% in April, is down 4.6% from a year ago, and is down at a 6.3% annualized rate from the peak in July.  Not only have we never experienced a Fed trying to fight an inflation problem under an abundant reserve regime, we’ve never seen M2 grow so fast for so long, or decline so rapidly, at least since the Great Depression.  If the recent data are accurate, this is not a good sign for Real GDP growth in the year ahead and consistent with our view that we’re headed for a recession.

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Implications:  New home sales continued to recover in April, signaling that activity may have hit at least a temporary bottom back in mid-2022.  While sales are on an upward trend recently and are now up 25.8% from the low in July of last year, they still remain well below the pandemic highs of 2020. The main issue with the US housing market has been declining affordability.  Assuming a 20% down payment, the change in mortgage rates and home prices in just the past year amounts to a 13% increase in monthly payments on a new 30-year mortgage for the median new home.  With 30-year mortgage rates currently sitting near 7.0%, financing costs remain a headwind.  However, the median sales price of new homes has fallen by 15.3% from the peak late last year, which has helped sales activity begin to recover.  Notably, while a lack of inventory had contributed to price gains in the past couple of years, in general, inventories have made substantial gains recently.  The months’ supply of new homes (how long it would take to sell the current inventory at today’s sales pace) is now 7.6, up significantly from 3.3 early in the pandemic.  Most importantly, the supply of completed single-family homes has more than doubled versus a year ago.  This is in contrast to 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 should continue to help moderate new home prices and put a floor under sales activity.  One problem with assessing housing activity is that the Federal Reserve held interest rates artificially low for more than a decade.  With rates now in a more normal range, 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 homebuyers will eventually adjust, possibly by looking at lower priced homes.  Finally, on the manufacturing front, the Richmond Fed index, a measure of mid-Atlantic factory activity, fell to -15 .0 in May from -10.0 in April, still signaling contraction.

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If you’ve been to a high school or college commencement lately, then you know the drill: at some point at least one speaker will urge the graduates to be “agents of change,” suggesting they’d like to see these students make the world a better place through some sort of social activism.

The problem with goading students to think this way is that it assumes they should be dissatisfied with the status quo.  It asks students to dwell on the negative, to focus on what is wrong, to obsess on injustices, whether perceived or real.  Which makes us imagine an alternative message that we rarely, if ever, hear: for graduates to go forth thinking about what is already good, to dwell on what is worthy of conserving, and why sometimes it can be important to be barriers to change.

In the context of protecting the environment, this message makes sense to pretty much everyone: let’s be careful stewards of nature.  People may disagree with what this means in certain contexts and may disagree about how to weigh trade-offs, but everyone agrees that environmental concerns shouldn’t be casually dismissed.

At the same time; what does changing or reimagining the US mean?  No country close to the population size of the US has wealth or income per person even close.  People from around the world are eager to move here.  Think about our blessings: property rights, freedom of contract and the ability to enforce those contracts, a democratic republic with a Constitution that separates executive and legislative functions, a bicameral legislature that makes it tough for temporary voting majorities to impose their will, and social institutions that foster individual rights.  The list goes on and on.

And yet the academic class would like those graduating its intellectually narrow, and often overly shallow, confines to dwell on how to make our society different from what it is today.

Maybe that’s a natural consequence of living in a high-income and wealthy society.  Academics, who in times past had higher status than those who run businesses, must think to themselves that something must be seriously wrong or rotten with a society in which so many others have more prestige than they have.  If so, what’s being taught in schools and conveyed in commencement speeches simply reflects the status anxiety of the intellectual class and we should accept it as a symptom of long-term economic improvement (higher income and wealth) for people outside academia.

But, even if so, that doesn’t mean we should completely ignore or reject their message to be agents of change.  After all, our country’s Founders were, in a sense, agents of change themselves, while also doing so in a way that conserved and expanded freedoms that had developed in certain parts of Western Civilization.

We can think of two areas in particular that are ripe for change, just in the education system itself.  One would be breaking up government-run primary and secondary school systems by making school vouchers as widespread as possible.  Another would be requiring colleges to have skin in the game when they get student loan money.  If a student can’t repay a student loan, maybe colleges should eat half the cost.  Or, instead of getting all the loan funds up-front, colleges should only get half up front, while also getting a 50% stake in all future loan payments (interest and principal) made by their students.  How about that for change?

In the end, it’s also important to remember that preserving our dynamic free-market economic system is also a way to foster the kind of change that America needs, the kind that leads to less poverty and higher incomes.  More entrepreneurship means more change, not less.  Every single day, the US is built back better by entrepreneurs, while government flounders around making mistakes.

Look, it may be that the US is headed for a recession in the near term.  But we also think that once graduating students embrace real change that also conserves what is best, while addressing the government failures that make things worse, they will help lead to the next bull market, which will be a long and strong one.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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We live in unprecedented times. Since the COVID pandemic, the economy has been deeply influenced by a massive increase in government spending, COVID-related shutdowns, and a huge increase in the money supply.  In all our years of economic forecasting, the task of identifying where we are and where we are heading has never been so difficult.  Now more than ever, it is important to follow real-time data on the economy. The charts in the High Frequency Data Tracker follow data that are published either weekly or daily, providing a check on the health of the US economy. 

Click here to view the report

Implications:  Existing home sales slipped 3.4% in April as homebuyers continue to a navigate a challenging housing market.  We expect the outlook to be choppy moving forward as the housing market faces a series of crosswinds.  First, mortgage rates that are currently hovering near 7% remain a headwind to activity.  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 27% increase in monthly payments on a new 30-year mortgage for the median existing home.  The shock of higher financing costs on non-homeowners (potential buyers) meant a short-term reduction in sales in 2022; but that negative impact should be diminishing as people adapt to a higher level of rates. While financing costs remain a burden, the good news for prospective buyers is that median prices have fallen 1.7% in the past year, which should help boost future sales.  Meanwhile, many homeowners will be reluctant to sell due to a “mortgage lock-in” phenomenon, after buying or refinancing at much lower rates before 2022.  That should limit future sales (and inventories). While we expect a continued moderation in national listing prices, a tight inventory of existing homes should prevent a repeat of 2008.  Case in point, the months’ supply of homes (how long it would take to sell existing inventory at the current very slow sales pace) was 2.9 in April, well below the benchmark of 5.0 that the National Association of Realtors uses to denote a normal market.  Finally, a weaking economy in which the Federal Reserve doesn’t act quickly to cut rates, because of high inflation, could be a headwind for home sales later this year.  On top of this, new fee changes that went into effect May 1st as part of the Federal Housing Finance Agency’s push for affordable housing will effectively subsidize homebuyers and refinancers with riskier credit ratings by charging higher fees to those with good credit scores.  These changes are likely to cause extreme confusion and result in pricier monthly mortgage payments for most homebuyers.  Adding this altogether, expect sales and prices to drag on in the year ahead, with no persistent recovery in housing until at least late 2023 or early 2024.  In employment news this morning, initial claims for jobless benefits fell 22,000 last week to 242,000.  Continuing claims declined 8,000 to 1.799 million.  Notably, it was recently discovered that much of the apparent uptrend in national initial jobless claims can be attributed to massive, organized fraud in the state of Massachusetts.  Until these data are corrected, investors should be careful interpreting any perceived trends.  In other news this morning, the Philadelphia Fed Index, which measures manufacturing sentiment in that region, rose to a still weak reading of -10.4 in May from -31.3 in April.  These data are consistent with a weakening economy and our view of an impending recession in 2023.

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Implications:  Home building rose slightly in April as developers continue to navigate a challenging housing market.  Looking at the details, both single-family and multi-unit starts contributed to the headline gain in April, although starts were revised down for prior months.  Developers continue to be cautious with the 30-year mortgage rate hovering near 7%.  However, it does look like single-family construction has found at least a temporary bottom.  One reason may be that some of the sticker shock from the rapid run-up in financing costs last year is beginning to wear off.  This is good news for overall starts because single-family construction has been largely responsible for the decline in activity in the past year.  Though groundbreaking on new residential projects is down 22.3% from a year ago, keep in mind that construction overall has hardly ground to a halt. Lots of projects were already in the pipeline, with the number of homes under construction hovering near the highest level on record back to 1970.  These figures also demonstrate a slower construction process due to a lack of workers and other supply chain issues.  Given that builders already have their hands full, it was not surprising to see permits for new projects fall 1.5% in April.  While we don’t think housing is going to be a source of economic growth in the year ahead, recent numbers are not what you’d expect to see if there was a severe housing bust like the 2000s on the way, either.

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Implications:  Industrial production came in better than expected in April but was revised down in prior months, leaving the level of output in April right where the consensus expected.  The biggest contributor to the gain in April itself was the manufacturing sector where activity rose 1.0%, with auto output soaring 9.3% and the rest of the manufacturing sector gaining 0.3%.  Given the trend of consumers shifting their preferences back toward services and away from goods, we don’t expect as robust gains in manufacturing in future months.  We are still forecasting a recession ahead with the goods sector leading the way.  Meanwhile, the mining sector was another source of strength in April, posting an increase of 0.6%.  The gain was driven by a faster pace of oil, gas, and other mineral extraction as well as more drilling of new wells.  Given that the mining index remains below its pre-pandemic highs, we expect this series to continue to be a lifeline for industrial production in the near term.  Finally, the one source of weakness in April came from utilities which are volatile and largely dependent on weather.  The Federal Reserve points out that the 3.1% drop in April was due to a decrease in demand for heating as milder temperatures returned following an unseasonably cold March.  In other recent factory news, the Empire State Index, a measure of New York factory sentiment, plunged unexpectedly to -31.8 in May from +10.8 in April, posting the largest monthly drop since the early days of the COVID pandemic. We also got data on the NAHB Housing Index this morning, a measure of homebuilder sentiment, which rose to 50 in May from 45 in April.  This is the fifth consecutive gain and the first time the index has cracked 50 since July of 2022. An index reading of 50 signals that an equal number of builders view conditions as poor versus good and that sentiment is now neutral following nearly a year of pessimism.

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