EconoFACTS

June 27, 2023 | 10:36

Turning Up the Volume on U.S. Soft Landing Chatter

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has been wi... (Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has been wi... (Read more)

Resilience is keeping that recession at bay...

Delayed (not a bad thing, until it is) U.S. recession chatter has gained more followers over the past few weeks. Rumblings began with strong retail sales results for April, then became louder with solid real PCE results for the same month, then really let loose with the—albeit mixed—May jobs report.

Well, put on your earplugs. The latest round of economic releases was resoundingly solid.

On the business investment side:

It was surprises all around, with U.S. durable goods orders unexpectedly rising in May; and not just by a little bit, but by solid 1.7%, the third gain in a row. We are all well aware of how volatile this report is, particularly as aircraft orders (+17.8%) can skew the headline considerably. But the orders increase was fairly widespread, from primary metals to machinery, electrical equipment, and motor vehicles. Computers took a step back, while communications equipment fell for the third straight month.

Most importantly, the key components that are fed into the GDP bucket also fared well:

Core orders (nondefense capital goods ex aircraft), a proxy for future capital spending, rose 0.7%. Yes, April's +1.3% is now +0.6%, but the fact that May actually climbed firmly is quite astonishing.
Core shipments (nondefense capital goods), a proxy for actual spending, jumped 3.4%, the biggest advance in over two years. That's 5.7% so far in the quarter (annualized), which points to upside risk for GDP.

On the housing front:

New home sales (also highly volatile) unexpectedly rose in May, and wow did they rise! Sales surged 12.2% in May alone, the third increase in a row and the biggest since last August. The current level of 763,000 units, annualized, is the highest since February 2022. Across the country, well, the contracts were signed in all regions (NE, MW, South and the West), which pulled inventories and the months' supply lower. More demand means higher prices, with the median sales price up 3.5% in May, reversing the prior month's decline. And, other price measures have turned the corner. The S&P CoreLogic Case-Shiller home price index for the top 20 metro areas jumped 0.9% in April, the second increase in a row and doubling expectations. The FHFA house price index has been up for four straight months, with April's 0.7% increase the largest so far.

How about that consumer?

After feeling a little glum for two straight months, the American consumer really perked up in June. The Conference Board's consumer confidence index jumped 7.2 pts (more than expected) to a 17-month high of 109.7 in June, with a sunnier disposition felt for both the present situation (+6.4 pts to a 2-year high of 155.3) and the future (expectations +7.8 pts to a 6-month high of 79.3).

How can this be? With still-sticky and stubbornly high inflation (core, services, supercore, in particular) and all this (fading) recession talk?

As we've stated countless times, it all comes down to jobs. Having a job. Having a steady income. That's key. And, after a few shaky months, more respondents saw jobs as being plentiful while fewer said that jobs are hard to get. On net, the improvement in the labor differential hints that the current 3.7% unemployment rate will fall in June (we will find out next week). One source of comfort for the Fed .... inflation expectations a year out slipped for the third consecutive month.

Bottom Line: The U.S. economy continues to steadily defy expectations and the fact that it is doing so without lots of hoopla is a good thing. Meantime, the Federal Reserve is data-dependent and will continue to watch the labor market and inflation to determine its next steps.

Table 1 - United States — Consumer Confidence Index

(1985 = 100)

Source: BMO Economics, Haver Analytics

Table 2 - United States — Durable Goods Orders

(month/month % change : s.a.)

Source: BMO Economics, Haver Analytics