Housing Activity Slows, Consumers Remain Solid

This morning, housing starts fell 6.8% in July, significantly more than expected, dropping from 1.33M to a 1.24M unit pace, reflecting a 14% decline in single-family starts, the largest since early 2020. Year-over-year, housing starts are down 16%.

Housing permits, meanwhile, fell 4% in July from 1.45M to a 1.40M unit pace. Single-family permits fell -0.1%, the sixth consecutive month of decline while multi-family fell 11.1% nearly offsetting last month’s 16.3% increase.

Additionally, this morning, the preliminary University of Michigan Consumer Sentiment Index is expected to tick up from 66.4 to 66.9 August, potentially marking a two-month high.

Yesterday, retail sales rose 1% in July, more than double the expected increase, and a significant improvement from a -0.2% lull in June. Year-over-year, retail sales rose 2.7%.

In the details, ten of the report’s 13 categories posted gains including a sizable rebound in car sales (+3.6%) following last month’s cyberattack on auto dealers, electronics sales (+1.6%), food and beverage sales (+0.9%) and e-commerce (0.2 %). Gasoline sales also gained for the month (+0.1%) following two consecutive months of decline.

Excluding autos and gasoline, retail sales rose 0.4% in July, double expectations, and 3.4% year-over-year. Meanwhile, control group sales increased 0.3%, also surpassing the 0.1% rise anticipated, and 3.7% over the past 12 months.

Bottom Line: A stronger than expected retail sales report in July underscores the ongoing resilient nature of the American consumer. Despite indications of a somewhat cooler labor market, high prices and elevated borrowing costs, consumers continue to spend, although the pace of expenditures has slowed from earlier peak levels. That being said, the question remains whether or not relatively reduced levels of hiring are a reflection of a normalization process or more precipitous weakness to come, potentially compounding pressure on households.

For now, consumer activity continues to be a solid support to growth with second-quarter GDP gaining significant momentum and Q3 growth on track to near 3%, according to the Atlanta Fed’s GDPNow model. Although fears of a weaker jobs market and the potential negative impact on consumer spending continue to play a key role in the market’s expectations for Fed policy action sooner than later potentially distracting from the Committee’s focus on achieving prices stability.

Also yesterday, initial jobless claims fell for the second week in a row, down 7k to 227k in the week ending August 10th, the lowest level since early July. Continuing claims, or the number of Americans receiving unemployment benefits, also declined to 1.86M in the week ending August 3rd.

Next week, the economic calendar begins on Monday with the July Leading Index, followed by weekly mortgage applications on Wednesday.

Later in the week, on Thursday, weekly jobless claims, the Chicago Fed National Activity Index, along with the S&P Global readings for ISM Manufacturing, services and Composite PMIs, July existing home sales, and the Kansas City Fed Manufacturing Activity Index. Wrapping up the week Friday, we’ll take a look at new home sales for July.

Finally, on the Fed-speak front, it’s pretty light next week but we will hear from Atlanta Fed President Raphael Bostic on Tuesday, followed by the July 31 FOMC meeting minutes release on Wednesday.

While the July statement left the door open for a potential September increase, the statement noted that the Committee was not yet confident in the current disinflationary trend to justify a pivot in policy just yet. Investors will be reading closely between the lines to see what Fed officials are looking for to gain more assurance and move forward with the first-round cut.

-Lindsey Piegza, Ph.D., Chief Economist