Growth in Durable Goods
We begin with the US Durable Goods which came in with a month-over-month growth of 4.7%. However, when we take out the transportation sector, which is done for GDP purposes, then we see that growth was a more tepid 0.63% month-over-month growth. For the last 12 months, the average monthly gain for the US Durable Goods excluding transportation has been 0.36%.
Decline in home sales is only slight
Last week, we also received a new reading on new homes sales which declined from the recent high of the prior month. Given the sudden surge in June, it is no surprise that July’s reading would be a little weaker. What is also positive is that the median price only declined a little. This would seem to indicate that home buyers are willing to buy despite the increase in mortgage rates over the last 12 months.
Both PCE & CPI show relatively strong declines in inflation
Last week, we also received a new PCE (Personal Consumption Expenditures) reading on inflation. While the CPI (Consumer Price Index) is perhaps the more well-known reading on inflation, the Federal Reserve prefers the PCE index. However, at the headline level both have shown relatively strong declines primarily with reductions in both food and energy.
Core PCE price index on inflation shows a solid one-month decline
However, the more closely watched number is the core PCE index which is taking a longer path to decline but did have a solid one-month decline to 4.1%. While the one-month decline is desirable, it is still a little more than twice the Fed target of 2%. While the Fed in their set of projections, estimates that core PCE will be about 3.9% by the end of the year, we have seen some estimates as low as 3%.
Inflation in Services remains high
However, inflation in Services is remaining stubbornly high and stable, while the Goods section of the economy is already experiencing some deflation.
With Services being such a large part of our economy, we need to see a decline in services inflation in order to reach the 2% target of the Federal Reserve.
Personal income sees improvement
Real (inflation adjusted) personal income increased 0.18% month over month and 4.75% year over year, which would indicate that households in the aggregate are no longer “treading water” in terms of income and inflation which is also showing up in the increase in personal spending.
Expecting another rate increase for the Fed to stabilize
We also received a reading on the second quarter GDP, which came in at a 2.4% annualized rate with personal consumption and business investment being the strongest contributors. Trade and home building were slight drags.
The Fed increased rates another 25 basis points and very little change to their statement from last month. We would expect another rate increase later in the year and then for the Fed to be stable. We do not expect rate cuts by year-end. The Fed did not update their forward expectations and so, from June, they expect 2023 to have positive GDP growth of about 1%, which would imply zero to slightly negative GDP growth for the rest of year to balance out the year to date growth of about 1.1%.
With growth in both GDP and real income, there is a growing sense among some that we could have a situation in which inflation declines at an acceptable (whatever that means) rate without the Fed having to push us into a recession. This is the so-called soft landing scenario.
While a soft landing scenario is possible, it appears to overly rely on ongoing strength in the labor markets and growth of income. Should inflation not decline at a fast enough rate, or if we encounter a weakening of real income, then we could end up with stagflation in which growth and inflation are essentially balanced (we have used the term treading water).
As we noted, we do expect a “higher for longer” scenario for rates which will mean that companies and consumers will need to watch their balance sheets carefully and be cautious with the use of debt.
More Economic Insights
- Economic Update: Rate Cuts to Be Shelved by the FedWith recent numbers indicating a weakening of the economy—but nothing to indicate a recession—and positive job growth, it seems reasonable that the Fed will continue to focus on bringing down inflation through other means rather than by issuing rate cuts.
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- Investment Intelligence: Decoding What Matters in Global MarketsA panel of Financial Planning professionals from REDW Wealth will share their insights on the global economy and the markets, past and present.
- Reducing Risks in Retirement Plan Management with Paul Madrid, CPA®, CFP®, AIFA®This episode, Wes Benally and Paul Madrid discuss the Tribal fiduciary role and reducing risk in the management of employer-sponsored retirement plans.
© 2023 REDW Wealth LLC. This publication is intended for general informational purposes only and should not be construed as investment, financial, tax, or legal advice. Information and instruction shared in the article above do not guarantee outcomes, performance, or quality of services provided to REDW Wealth Management clients by REDW Wealth Management or its employees. Adherence to our fiduciary duty is not a guarantee of client satisfaction or any particular outcome. Advisory, Assurance, and Tax is offered through REDW LLC. Wealth Management is offered through REDW Wealth LLC.
