WASHINGTON — Data this week generated a mixed report card of the U.S. economy, showing both resilience in the face of high inflation and signs of troubles ahead.
Consumers continue to spend, albeit with less gusto, and applications for unemployment benefits remain historically low. The once-booming housing market is deteriorating fast, while the manufacturing sector is losing momentum, but not as quickly as feared.
One illustration of the conflicting forces at play was a survey of manufacturers in the Federal Reserve Bank of Philadelphia’s region: About 26% of producers reported increased activity, while 20% noted a decrease.
Here’s a rundown on the state of the economy:
Consumers
A significant pullback in gasoline prices in July lifted sentiment and freed up cash for consumers to spend elsewhere.
Retail sales excluding gasoline and motor vehicles rose a better-than-expected 0.7% in July. Outlays increased at a range of merchants including building-materials outlets, electronics and appliances stores, and online retailers.
The data suggest the backbone of the economy is largely holding up in the face of the fastest inflation in a generation. The spending mix, however, appears to have changed to more essential goods as inflation forces shoppers to pay more for basic items. Plus, people are spending more on services like travel.
Big retailers like Walmart Inc. and Target Corp. are gearing up for a healthy shopping season this fall after sharply cutting prices on things like apparel and kitchen appliances in recent months that reflected a swift change in consumer preferences. Others aren’t as sure.
“The staying power of consumers has been quite robust, but it’s showing signs of running out,” Wells Fargo & Co. economists Tim Quinlan and Shannon Seery said after the retail sales report. “Our baseline expectation is for consumers’ staying power to last into Labor Day, and once the kids return to school and the bills come due, households will begin to tighten their belts.”
More complete July spending data, which includes services, will be released later this month.
Housing
The housing market, however, extended its rapid decline as high borrowing costs and waning demand stifled homebuilding and sales.
Construction starts fell last month to the slowest pace since early 2021, and existing-home sales — which make up the lion’s share of the market — tumbled for a sixth straight month to the lowest level in more than two years. Meantime, more buyers canceled home-purchase deals, adding to the sector’s woes.
The nearly 26% decline in previously owned home sales since January marks the steepest six-month plunge in records back to 1999. And while inventory is picking up, many properties continue to sell quickly. Mortgage rates have started to ease some, while home price growth is starting to slow, but only gradually.
“We’re witnessing a housing recession in terms of declining home sales and home building,” said Lawrence Yun, chief economist at the National Association of Realtors. “However, it’s not a recession in home prices. Inventory remains tight and prices continue to rise nationally.”
Manufacturing
Unlike housing, it’s not immediately clear what’s happening in manufacturing. At the start of the week, a gauge of New York state factory activity plunged in August by the second-most in data back to 2001 amid sharp declines in orders and shipments. But on Thursday, a similar measure for the Philadelphia area unexpectedly expanded for the first time in three months.
Other data out this week, which reflected activity a month earlier in July, showed factory production increased for the first time in three months, further complicating the picture.
The outlook is also a bit muddy. While both the New York and Philadelphia Fed bank surveys saw improvements in the six-month expectations for general business conditions, a greater share of Empire State factories see orders growing in the months ahead. However, more Philadelphia-area factories expect bookings to fall than to increase.
The S&P Global U.S. manufacturing index due next week will help offer more clarity on the health of factories nationwide.
Labor market
This week’s labor market figures remained robust, with applications for unemployment insurance stabilizing at a historically low level in the week ended Aug. 13. Filings have gradually moved up in the past few months, potentially suggesting some cooling, but altogether, the data indicate the labor market remains extremely tight.
Similarly, continuing claims have edged up in recent weeks but are still a stone’s throw from the multi-decade low seen in mid-May.
The latest regional Fed manufacturing snapshots also pointed to a stronger hiring outlook.
Earlier this month, the July jobs report showed that labor demand remains extremely strong as employers added more than double the number of jobs forecast and the unemployment rate fell to 3.5% — matching a five-decade low. The August update will come out early next month.
Outlook
Looking ahead, one indicator in particular this week suggested storm clouds are building for the economy.
The Conference Board’s leading economic index, which includes metrics like the S&P 500 index of stock prices and building permits, fell for a fifth straight month in July. The group says this suggests greater recession risks in the near term.
“Consumer pessimism and equity market volatility as well as slowing labor markets, housing construction, and manufacturing new orders suggest that economic weakness will intensify and spread more broadly throughout the U.S. economy,” said Ataman Ozyildirim, the Conference Board’s senior director of economics.
