August 18, 2023 | 13:36
U.S. Economy: Summer Breeze
The Fed can blame the weather, perhaps, for why the economy appears to have warmed up instead of cooled down as hoped for. Rather than hunkering down in air-conditioned homes, many Americans spent steamy July shopping in air-conditioned malls, stores and diners. Retail sales shot up 0.7% last month, and the control measure that the BEA uses to tally GDP jumped 1.0% even after hefty gains in the prior three months. Of course, apart from a large spike in food services, we don’t know what happened to overall services spending. But weekly data on payment card use from the BEA and Affinity Solutions suggest it remained sturdy through early August.
Another ‘1.0’ also highlighted the economy’s resilience. Industrial production rose that much in July, though largely due to two special items: cranked AC use and sped-up auto assemblies. The latter accounted for most of the 0.5% bounce in manufacturing, but has now returned to normal levels. Mixed data from the New York and Philadelphia Fed surveys suggest factory output will contract for the third time in four months in August. Meantime, the labour market remains healthy, with the trend in new and continuing jobless claims little changed in recent months after rising earlier this year.
The strong retail report warranted a half-point upward revision to our Q3 real GDP growth estimate to 2.5%. And, there’s still upside risk, as the Atlanta Fed’s Nowcast estimate has stormed to 5.8%. However, it’s early days in the quarter and that metric has a history of starting off hot (or cold) before fading (or warming) by quarter’s end. Walmart indicated that households are cutting back on discretionary items as they spend more on costly necessities, such as groceries. Moreover, construction spending on manufacturing facilities, which soared more than 80% in the past year due to earlier legislation to incent reshoring and climate change initiatives, cooled in May and June. The housing market is also under renewed pressure from 30-year mortgage rates topping 7%, the highest in 21 years. While starts popped in July, they retraced only a fraction of the prior month’s decline and are little higher than a year ago. Stalled permits and a recent pullback in builder sentiment flag slower construction ahead.
Bottom Line: The U.S. economy likely picked up this summer, leading us to bump up our 2023 annual call to 2.2%. But we left the 2024 forecast unchanged at 1.0%, as it’s likely just a matter of time before mounting headwinds—notably the lagged effect of tighter Fed policy and lending conditions—overwhelm fading tailwinds, such as excess savings and revenge spending.