Weekly Economic Update 07-19-24: Retail Sales; Home Builder Confidence; Housing Starts; Building Permits; Industrial Production; Leading Economic Indicators; and Future Changes to the Weekly Update

The views and opinions expressed in this post are solely those of the author and do not necessarily reflect the views of the Georgia Institute of Technology or the Georgia Board of Regents.

Back from a great vacation. Did anything happen this week while I was gone?

Retail Sales

First out of the gate this week was retail sales (full release here). And they surprised to the upside! In total, they were virtually flat month-over-month, but were expected to decline by 0.4%. If you remove motor vehicles, sales were actually UP 0.4%. (This was largely due to a cyberattack on auto dealers which hampered sales.) "Core" retail sales (sales excluding automobiles, gasoline, building materials, and food services) rose 0.9% in the month, the largest monthly increase in 18 months. Removing the drop in auto sales, falling gas prices, and slowing demand for dining out, helped the overall number.

It is only fair to point out that one reason total retail sales were flat was because the May number was revised UP! Yes, you read that correctly. A previous month's data was revised UP. For six of the last eight months, retail sales had been revised down in subsequent months, but for May, it was revised up, and the May revision was the largest monthly revision since early 2023. It appears the consumer still has some room to spend.

As I point out every month, these numbers are reported in nominal terms, i.e., they are not adjusted for inflation. If you adjust for inflation, retail sales are negative on a year-over-year basis, and have been running negative for five of the six months reported this year. In other words, adjusted for inflation, consumers are spending less than they did one year ago. This confirms what we have seen over the past few weeks that the overall economy is slowing down.

Home Builder Confidence

Continuing on the theme of a slowing economy, for the third month in a row, home builder confidence declined, with the index falling to 42...the lowest level since December 2023 (full release here). A major reason for the decline in confidence is that the 30-year mortgage rate remains elevated at just under 7%.

When asked, 31% of builders say they cut prices in July, which is up from the 29% that reported cutting prices in June. The average price cut was 6%. Further, 61% of builders reported using some sort of sales incentive (other than price cuts) to improve sales.

Two of the three sub-components that make up the index - current sales conditions and traffic of prospective buyers - both fell by 1 point. The problem here is one that occurs in a classic deflationary spiral. Both buyers and builders have bought into the rate cut hype. With the prospect of falling rates, buyers are asking themselves "why should I buy today when it will be cheaper tomorrow?" As such, they will just wait and get it cheaper when rates are cut. Similarly, builders are making the same calculation with respect to building homes..."if the cost of borrowing is about to fall, why would I borrow now?" Of course both of these assume that rates are coming down soon. As regular readers know, I don't believe they are. (Or at least they shouldn't!)

Building Permits and Housing Starts

But those rate cut hopes caused builders to request more building permits and start more houses in June than were expected (full release here). After three months of declines, the number of building permits issued rose in June by 3.4% driven entirely by multi-family permits for buildings with five units or more. Permits for smaller multi-family units actually fell. In addition, single-family permits fell for the fourth consecutive month, falling another 2.3% in June. Builders are anticipating lower borrowing costs and are ramping up for multi-family units.

A similar story emerged with housing starts in June. Experts were expecting starts at an annual rate of 1.30 million units, but the data came in at 1.35, again driven entirely by multi-family units. Single-family housing starts fell for the third consecutive month to an annual rate of only 980K units - the lowest rate since last October. In contrast, starts for multi-family units surged 20% as builders respond to buyer demand - fewer people can afford a home and instead are forced to rent. In total, construction of new homes is down 4.4% from June of last year.

Industrial Production

Finally, some positive news from the industrial sector (full release here). For the second month in a row, industrial production in the U.S. rose, gaining 0.6% in June. On the manufacturing side, growth was "driven" by auto manufacturing (pardon the pun) which was up 1.7% in June. But even if you exclude motor vehicles, manufacturing was still up 0.3% for the month. On the utility side, the monthly increase was due largely to gas and electric utilities which posted a 2.8% advance in production. Why? Because it was hot! We cranked up our air conditioners in June far more than usual as the month of June was the hottest on record according to data going back 130 years! (For those of us in the South, if June and July are this hot, August is going to be brutal!)

Leading Economic Indicators

Lastly this week, we got the June reading for the leading economic index (full release here). It dropped...again. It always drops. It has been dropping steadily since early 2022. And yet, we have no recession, and many "experts" don't think there is one on the horizon.

According to The Conference Board, the "Leading Economic Index (LEI) provides an early indication of significant turning points in the business cycle and where the economy is heading in the near term." Really? As I have pointed several times before, it doesn't seem to do that anymore. Typically a down turn in the LEI has led a recession by just a few months. But now, the index has now been moving down for nearly two and a half years! Perhaps they need to rework the leading index because it clearly isn't doing what they claim it does.

You have to love their dedication to the index though! According to their "Senior Manager" of Business Cycle Indicators, because of "the smaller month-on-month rate of decline, the LEI’s long-term growth has become less negative, pointing to a slow recovery." A slow recovery? Recovery from what?!? According to the economists at the National Bureau of Economic Research (NBER) we never had a recession! (Despite the fact that GDP was negative for the first and second quarter of 2022!) Not sure what exactly they are talking about. Frankly, I'm not sure they do either.

Final Thoughts

Closing in on 1 year of putting out this weekly update. The level of interest and number of subscribers is far beyond what I ever would have expected. Thank you all for your support and for sharing this with your networks.

In addition to sharing the update, many of you have expressed a willingness to financially support this weekly update. The data service I use to generate the graphs is quite expensive. It is very useful for visualizing data, but also very costly. As such, I am considering ways to offset that cost.

One option (and the easiest) would be a sponsorship. Perhaps someone out there would like to sponsor the weekly update? A bank? A chamber? A mortgage company? A rich, private individual? If I could get a sponsor we could include your logo on the update and that would allow me to continue to provide this weekly update free of charge. Any takers?

A second option would be to offer a "paid" subscription version of the weekly update. A paid subscription would include the text with graphs (as currently presented), and will allow for readers to provide comments to the posts. In addition, for paid subscribers I would host occasional online discussions on various topics. For those who chose not to become a paid subscriber, I would continue the weekly update, but it would be a text only version...no graphs, no ability to comment, and no participation in economic threads/discussions. The cost for the full subscription would be $8/month.

However, before I move forward with either option, I would like to know your thoughts and try to gauge the level of interest. Would any of you be interested in sponsoring? Is the information I provide here worth $8/month? Please let me know your thoughts! I am going to open up comments on this week's post and I would encourage you to share your opinions on the matter.