Strategy in TECH...
More signs of a potential downturn in the economy are emerging almost every day now, causing red flag warnings to be popping up just about everywhere. The fact that there are multiple warning signs that come from different sources tends to reinforce the general thinking that the U.S. economy is quickly entering the danger zone.
No doubt about it, for the last few weeks, storm clouds have been gathering as many are seeing a darkening outlook for the U.S. economy. In just the last few days, three key pieces of data – red flags, really – suggest we all need to be vigilant in tracking where the economy is headed. These three pieces of data include: 1) another consumer survey showing eroding confidence; 2) key retailers warning of slowing sales from tariff increases; and 3) a new Fed estimation that the GDP will contract -2.8% in the first quarter of 2025.
Another sign of a deteriorating consumer outlook arrived last Friday in the form of the Index of Consumer Sentiment (ICS), another highly respected data resource from the University of Michigan that is widely followed by economists, financial analysts, Wall Street, the Federal Reserve Board, government officials, the media, and more. Widely viewed as a reliable indicator of how consumers are feeling about their current circumstances, as well as their outlook for the future, and their expectations for inflation – it is a leading indicator of future economic direction.
The preliminary result of the ICS for February registered a significant drop in consumer sentiment. What is spooking consumers?
Sales of newly constructed single-family homes dropped to a two-year low in October as rising mortgage rates and persistent high prices impacted the affordability of available homes and served to keep buyers on the sidelines. Some experts also noted that elevated hurricane activity also kept buyers away, especially in the South region.
I continue to be intrigued by the growing influence of vinyl records, a once dominant media that by the early 2000s was thought to be dead. Now, however, after 17 back-to-back years of ever-increasing sales growth (according to RIAA data), it is back. A global phenomenon, this week the U.K. government announced it would now include vinyl records in its official basket of goods used to track inflation.
A key metric of the U.S. economy is consumer confidence – a reading of how confident consumers feel about the economy, both currently and in the near future. A confident consumer helps stimulate the economy by freely spending their money, as compared to an unconfident or insecure consumer who will instead pull back on spending to hold on to their money. Now, three major surveys that offer key readings on consumer sentiment in July show big gains in confidence – a bullish sign for the economy.
Chalk this up to good economic news! Yesterday, the latest Consumer Price Index (CPI) reading for the year through June shows that inflation continues to moderate, coming in at a reading of just 3% growth. That is well off the reading of 4% through May and much better than economists had anticipated.
But it is not yet time to open the champagne just yet, as we are likely to have another interest rate increase from the Federal Reserve Board (the Fed) later this month, and perhaps yet another one before the end of 2023 as they try to manhandle inflation down to their 2% target rate.
On the face of it, the inflation numbers for May seemed quite positive and an apparent validation of the Federal Reserve Board’s efforts to glide the economy into a “soft landing.” But the overall number, a 4% increase in the broader-based Consumer Price Index turned out to be a bit of an illusion, causing the Fed to leave interest rates at the current level, but forecast two more interest rate increases in 2023.
Residential construction of new homes – known as housing starts – continues to register monthly declines as a combination of still-high home prices along with rapidly rising mortgage rates results in collapsing home affordability. While economists continue to debate if and when the U.S. economy enters a recession – it’s clear that housing overall, and the home building segment specifically – is already there.
After a dramatic double-digit drop in May, June housing starts declined again, with overall starts not only dropping below May’s rate to a nine-month low but also coming in well below the rate in June 2021. Single-family starts in June hit their lowest seasonally adjusted annual rate since July 2020.
