A higher-than-expected increase in the unemployment rate caused significant panic last week. However, data from the Institute for Supply Management indicated that the services sector expanded in July, while the commerce department data showed initial jobless claims fell. The stock market made a modest recovery, partially erasing some of the week’s losses, and Treasury yields rebounded slightly.
While there are numerous indicators suggesting that recession fears may have been exaggerated, this week’s retail sales data will be crucial in alleviating investors’ concerns that a slowdown in consumer spending could drag down economic growth.
Private consumption has been the driving force behind the continued growth of the U.S. economy. Despite some easing in the second quarter, final sales to private domestic consumers grew by a solid 5.1%, down from an even stronger 5.6% in the first quarter. So far, lower inflation has provided a tailwind for household budgets. As inflation eased, real wages increased, delinquencies fell, and bank lending improved – resulting in more favorable conditions for consumers.
The first of July’s inflation reports, the Bureau of Labor Statistics’ Consumer Price Index (CPI) and Producer Price Index (PPI), will play a key role in guaranteeing a Federal Reserve rate cut in September. Consumer prices fell by 0.1% in June, bringing the annual increase in the CPI down to just 3%, with core CPI slightly higher at 3.3%.
Fed expectations have already driven interest rates lower. Even before the early August growth scare, the benchmark 10-year Treasury yield had fallen from this year’s 4.7% peak in May to below 4% at the end of July. However, a slowdown in the pace of disinflation, coupled with concerns about further weakening in the labor market, could trigger another stock market selloff.
Lastly, the U.S. Census Bureau will release its estimates for housing starts in July. Historically, housing starts have been an excellent predictor of changes in economic activity and business cycles. Higher mortgage rates during this year’s home shopping season caused home sales to dip and housing inventory to increase. As a result, builder confidence fell, and many builders delayed starting new projects. In June, housing starts hit an eight-month low. This week’s report is crucial: has the recent decline in mortgage rates supported a late-season increase in home buying activity that could get more builders back to work?
