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From the leading economic indicators keeping the long list of declines going to the ever-rising risks of recession to the slowed retail sales, July wasn’t a wholly positive month for the US economy. However, it wasn’t all doom and gloom — stocks and energy saw gains, somewhat battling the weaker industrial metal prices. 

According to Kevin Canterbury, founder of Redstone Capital Management, a decline of 0.7% occurred this month, following the 0.6% decline the previous month. As such, it continues the stretch of 15 consecutive negative reports, a feat that hasn’t happened since the 2007/08 crisis. 

Retail Sales Failed to Meet Expectations

While economists predicted retail sales to rise by 0.5%, the sector only managed 0.2% overall. However, subtracting the volatile elements from the equation (e.g., building materials, autos, and gas) flips that percentage on its head; the core measure gained 0.6%.

The most positive influences here came from online retail, electronics, furnishings, and miscellaneous stores, whereas food and beverage sales fell, hurting the overall gain. Experts attribute this decline to the expiration of pandemic food stamp benefits. 

Despite the unfortunate state of the sector, core sales remain up almost 5% year-over-year when negating the downward commodity pressures.

The Empire State Manufacturing Index Fell

July saw the Empire State Manufacturing Index fall by 5.5 points, retaining a positive level of 1.1. Unlike retail sales, this exceeds expectations of declining to -3.5.

While employment transferred to expansion and new orders moved slightly further into expansion, shipments fell. Although, it did keep its solid expansion status, giving experts a dim light at the end of a relatively long tunnel. 

Prices paid reduced by more than five points, but it wasn’t enough to knock the category from expansion — albeit an incredibly slow expansion (the slowest in three years). 

Home Sales Declined Below Forecasted Percentages

Existing home sales dropped by 3.3% to an adjusted annualized rate of 4.16 million units. On the surface, this may not seem diabolical, but experts forecasted a 2.3% decline, so both the single- and multi-family categories failed to meet predictions. 

They’re down by 18% over the past 12 months. However, the median sales prices rose slightly to $410,200, exhibiting a decrease of 1% on a year-over-year basis but remaining one of the highest prices since 1999, according to the NAR.

As for the supply inventory, it measured in at 3.1 months, roughly half the long-term average. And even though July is prime summer selling time, only two months over the last 22 years have shown fewer new listing.

A Mixed Bag for US Stocks

There’s optimism in the stocks world as investors’ positive sentiments continue following better inflation and potential recession avoidance. Disappointingly, such results are stock-specific. 

Growth sectors finished the month in the negative, contrasting recent strength, while value names showed a 2% gain. Small cap stocks performed better than large caps, making up some of their lost ground early in the year. However, communications and consumer discretionary fell by 2% and 3%, respectively.

The Federal Reserve Open Market Committee has decided to increase the “Fed funds rate” for the 11th time since March 2022. With an additional 0.25%, the new rate now falls within 5.25% to 5.50% as a means to address a looming recession. 

Economic Growth and Recession

Fortunately, Kevin Canterbury of Redstone Capital Management reports that the economy is doing well, with a 2% growth in Gross Domestic Product in the first quarter of 2023. However, for the second quarter, predictions say it will end up a tad lower, hovering between 1.5% and 2%. 

According to the International Monetary Fund, 2022’s economic growth is projected to be at 2.1%, going down slightly in 2023 to 1.8%, and dropping further to a projected 1% in 2024. 

Inflation and its Effects

As expected with the rapid rate hikes, inflation has been slowing down. Consumer prices used to go up at a rate of 3% for headline and 4.8% for core. However, the prices of homes and related expenses are decreasing slower than desired. 

Overall, while inflation is still in progress, it’s not as extreme as experts have projected. 

Although the experts over at the Federal Reserve are still unsure of what the optimal inflation level is, it’s clear that they’re shooting for a number lower than 3%. If true, and if things don’t get derailed, the 3% target might come to fruition by 2024.

Jobs and Employment

The job market has gone through the proverbial wringer since the pandemic. 

Businesses shut down, then reopened in the midst of a labor shortage. Things have mostly normalized since then, but some industries are still struggling to get enough manpower.

Despite the current situation, the unemployment rate is still low at 3.6%. It seems businesses are chugging along, holding on to the skilled workers that they have, which is a good sign that the economy is weathering the storm.

The Fed’s Decisions and Their Impact

In June, the Federal Reserve decided to take a break and let conditions ‘catch up.’ The Fed elaborates on their conservative approach by reminding dissidents that rate hikes have only been at 4% since December, and it takes time (about 1 to 2 years) for the economy to start showing cracks.

Allowing these conditions to ‘catch up’ reduces the risk of overcorrection. The Fed acknowledges that rate hikes are a hammer, not a scalpel, and that their current situation calls for a little more finesse.

Financial Markets and Interest Rates

As for financial markets, they’re celebrating that interest rates are unlikely to get higher. Businesses and real estate companies took advantage of the low interest rates, so now they’re in a good spot until loans/bonds come due and interest rates are still high. Though that isn’t really a big concern since maturities are spread over time rather than being lump sums that need refinancing.

Concurrently, bond defaults and bankruptcies are on the rise, putting pressure on the financial system. This is accompanied by people with low-interest mortgages refusing to move, bottlenecking the market for potential buyers. 

Economic Cycles and Outcomes

When needing to choose between inflation or recession, the right choice is a balancing act of staying in the middle–that is the Fed’s goal. 

So far, so good.

The economic outlook at the end of June provided some conflicting signals. While there’s good news, it’s clear that, now more than ever, every strategic investing approach requires careful attention to the details.

The Conference Board Index of Leading Economic Indicators reported a drop of 0.7% in May – the 14th consecutive monthly decline. This, along with stock market turbulence, suggests an economic slowdown is upon us. Despite this, resilience in the housing market and stability in the labor market are painting a more optimistic picture.

Kevin Canterbury of Redstone Capital Management in Arizona takes a closer look at the details most salient to those looking for balanced investment approaches.

An Unanticipated Upturn in the Housing Market

The best news in the recent reports was in housing and employment. Not only did existing home sales see an uptick of 0.2% in May, but housing starts, which signal the commencement of new residential construction projects, jumped a substantial 21.7%. This paints an optimistic picture for the current state of related sectors like construction, retail, and financial services.

Job Market Consistency

At the end of Q2, news from the labor market showed a reassuring steadiness. For starters, initial jobless claims – a kind of early-warning system for economic distress – were unchanged. In other words, the same number of people filed for unemployment benefits as in the previous period, indicating no increase in layoffs or job losses.

At the same time, the ongoing jobless claims, representing those who’ve been receiving unemployment benefits for a while, dropped slightly. This decrease suggests that some people have returned to work.

A Global Market Stirred by Interest Rates

The stock markets saw the most turbulence, with major U.S. indexes like the Dow Jones, S&P 500, and NASDAQ registering their first negative week in nearly two months. This downward movement was in part triggered by Fed Chair Jerome Powell hinting at an impending rise in interest rates.

Internationally, the strengthening U.S. dollar posed challenges for global markets. The decision by UK, Norway, and Switzerland’s central banks to raise interest rates also exacerbated fears of a possible worldwide recession.

Bonds, Commodities, and the Balance of Markets

The bond market showed resilience, however, as yields remained steady for the most part. However, the yield inversion between 3-month and 10-year Treasury notes signaled a shift that investors will certainly want to keep their eyes on, since this often precedes an economic downturn and an uptick in short-term interest rates. 

The commodities market further complicated the picture as oil prices fell, driven by fears of such a recession. A reduction in energy costs for consumers and businesses could stimulate spending in other areas.

That’s not the whole picture, though. Natural gas prices climbed due to the heightened demand caused by a heatwave. Higher utility bills for households and businesses could dampen consumer spending.

Summary

Economic indicators give us reason to exercise caution and encourage proactive strategies to mitigate potential risks. A strong housing market and steady jobs report show us that there’s plenty of opportunity for growth, even if the prospect of rising interest rates may influence investment decisions.