KEY DATA: Durables: +0.8%; Ex-Aircraft: -0.2%/ Confidence: +0.2 points/ Case-Shiller National Prices: +1.7%; Over-Year: +16.6%/ FHFA National Prices: +1.7%; Over-Year: +18%
IN A NUTSHELL: “Growth is slowing, and households seem to be taking stock of what may happen going forward.”
WHAT IT MEANS: The recent economic data point to continued economic growth, but at a more moderate pace, and today’s numbers do nothing but support that view. Durable goods orders rose solidly in June, but as usual, the headline number doesn’t tell the full story. Excluding the strong rise in aircraft orders, my preferred data point since airplane orders don’t lead to increased production for quite a while, demand for big-ticket items fell modestly. The details were also mixed as orders for vehicles, computers and fabricated metals dropped, offsetting increases in demand for electrical equipment, metals, machinery and communications equipment. There was a positive number in this report: Backlogs continue to build at a solid pace and that points to increases in production and hopefully hiring in the future.
There is some uncertainty setting in when it comes to consumer confidence. The Conference Board’s July index was up just a touch. There was a small gain in the view of present conditions while expectations eased back a touch. On Friday, we get the University of Michigan’s Consumer Sentiment Index, which had dropped sharply during the first half of the month. With Covid cases picking up and inflation pressuring households, it would not be surprising to see this measure post a solid decline for the entire month.
Speaking of inflation, as expected, home prices spiked further in May. Both the Case-Shiller and Federal Housing Finance Agency indices posted major increases, over the month and the year. Three of the nine regions in the FHFA index had home price gains over-the-year in excess of twenty percent, with the smallest rise being 15.4%. Similar increases were posted for the twenty cities in the Case-Shiller measure. These are clearly unsustainable rises that reflect the panic buying we saw over the past year. The surging home costs are reducing affordability, which helps explain yesterday’s sharp drop in June new home demand. IMPLICATIONS:Thursday we get the first reading on second quarter GDP and there is every reason to believe it will come in faster than 6.4% surge posted in the first quarter. But there is also every reason to think that going forward, we could see a constant moderation in growth that could get us back closer to trend 2% in over the next year or so. Part of the problem is the supply chain, which is not showing signs of being fixed in the near future. Housing costs are pricing households out of the market and inflation is eating into many workers purchasing power. With the supplemental unemployment insurance payments being cut by states and ending in September, much of the government-supported personal income growth is also coming to an end. But as is the case with most economic issues, there is the other hand. Slower growth should bring inflation down, easing pressure on the Fed to reduce asset purchases and/or raise rates sooner than expected. Indeed, the Fed members are making that argument, which is music to investors’ ears. Moderate growth is something that most economists like to see. Most economists have built into their 2022 forecasts an end of the pandemic (or a limitation of its effects). Let’s hope that is the case. But the pandemic is not over, yet many citizens and politicians are acting as if it is. The greater risk is on the side of slower economic growth next year, as the Delta and/or future variants could keep the pandemic going longer than expected.