Weekly Market Update: The economy continues to be characterized by both encouraging signs and reasons for pause

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The economy continues to be characterized by both encouraging signs and reasons for pause. Interest rates remain on the uptrend and are likely to continue for the near term as Treasury rates respond to ongoing strength in the underlying economic data. At the same time, new home sales and new residential construction give reasons for hope that home sales will continue to help bolster the overall economy. In addition, the backbone of economic growth—consumer spending—continues to show strength despite many headwinds that suggested retail sales would have begun to slow by now. These are all signs that the Fed may be closer to achieving its soft landing, but the leading index suggests that we should remain cautious in our outlook.

Consumers show big upside surprise in July: Despite rising credit card utilization and savings dipping back to pre-pandemic levels, consumers provided a surprising boost to July retail sales. Overall retail sales rose 0.7% last month, which is well above expectations. Excluding auto sales, the gains were even stronger and adjusting for inflation left the economy with a robust gain after upward revisions to previous data. Second quarter GDP growth saw businesses help consumers propel the economy forward, but consumers remain the largest slice of the economic pie, so this is optimistic data for avoiding recession during the third quarter.

New home sales rising as a share of the market: As existing home sales have been impacted by rising interest rates and low inventory, new home sales have begun to rise as a share of the overall market and this continued in July. Nationwide, nearly 16% of the single-family home sales were new construction, which is up sharply from just 11% of the transactions in April 2022. The recent survey of homebuilders showed that more were offering rate buydowns and other incentives in order to entice homebuyers. However, as existing home sales have begun to increase over the past few months, the market share of new homes has begun to plateau.

Housing starts rise again: Perhaps unsurprisingly, given the strong uptick in new home sales despite rising mortgage rates, housing starts increased to nearly 1.5 million units in July. This is near the level that many economists consider the minimum annualized rate of residential construction needed to accommodate new population each year. However, given several years of relatively lackluster new construction nationwide, this is not likely to help boost overall housing inventory back to levels that are typical. New home inventory is roughly double that of existing homes, but is also low compared to average levels. Homebuyer demand has certainly been impacted by rising rates, but supply remains the limiting factor at this point in the housing cycle.

Mortgage rates continue to rise: Last week, the Freddie Mac interest rate finally jumped above 7% after several weeks of daily rate quotes pointing to this looming milestone. At an average of 7.09% for a 30-year fixed-rate mortgage, this benchmark indicator is now at its highest level since 2002. In addition, 10-year Treasury yields climbed to 4.3% last week, which is the highest 10-year rate since November 2007. Since retail spending continues to rise at a fast pace, another rate hike by the Federal Reserve remains on the table for the next FOMC meeting. And although growth in 2-year Treasury yields has also been evident over the past week, it has been at a slower pace than longer-term bonds so the yield curve is slightly less inverted suggesting a lower probability of recession.

California labor market still holding strong: California’s unemployment rate remained unchanged in July at 4.6% and the state added 27,900 net new jobs as a resilient economy outweighs uncertainty. Government had the largest jump in jobs, but Leisure and Hospitality added 10,000 new jobs as spending at hotels and restaurants continues at a healthy clip. In addition, the latest unemployment insurance claims for the second week of August show the lowest level of new unemployment insurance claims in nearly 4 months. Below the surface, the sector that houses temporary workers fell by 12,300 last month, which offset relatively broad-based gains elsewhere and could suggest we may see the shortage of permanent workers continue to ease when the latest job-opening figures are released later this month.

Not out of the woods on recession yet: Although the labor market continues to expand and consumer spending has shown durability in the face of several challenges, the Index of Leading Economic Indicators continued its string of declines last month when it fell for the 16th consecutive time. This index is comprised of many indicators in addition to consumer spending and higher rates and weakness in the factory sector have offset strong spending numbers and kept the overall reading in contraction territory. Still, the labor markets remain very strong despite having fully recovered from the pandemic and the high-profile layoffs and bank failures of recent months have been more than offset by rising jobs in most other parts of the economy.

If you have any real estate questions or would like to discuss if now is a good time for you to buy, sell, or invest in a home or investment property, please feel free to contact me.

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