- Retail sales on weaker trend
- Home date trends lower
- Microsoft extends deal
Headline retail sales rose a modest 0.2% in June versus an upwardly revised 0.5% in May. Clothing and electronics sales were strongly pointing to a healthy, early back-to-school season. However, auto sales rose just 0.3% in June suggesting that a prior source of strength is weakening. Excluding autos, retail sales also rose 0.2% with spending at restaurants and bars rising just 0.1% versus 1.2% in the prior month. Though sales rose in seven out of 13 categories, the main takeaway was that spending on goods, rather than services, was the main driver. Plus, various signs show that delinquency rates are rising with nearly four in 10 households reporting somewhat or very difficult to pay for usual household expenses. Moreover, millions of student-loan borrowers this fall will have to resume monthly payments further limiting discretionary purchases.
Home Sales Data
These burgeoning signs of stress are increasingly showing in the housing sector. Already under stress due to the Fed’s rate hike program, more headwinds showed up in the data of existing home sales provided by the National Association of Realtors. Closings declined 3.3% to a 4.2 million annualized pace in June which was a five-month low. Compared with a year earlier, sales were down more than 17% on an unadjusted basis. Inventory constraints remain a key issue with the number of homes for sale at the lowest June inventory on record. The median sales price, at $410,200, is the second highest in data back to 1999. That is leading to many homes receiving multiple offers and about one third getting sold above the asking price as bidding heats up. These prices are too rich for first-time buyers as they fell to a historically low 27% of purchases. At the current sales pace, it would take 3.1 months to sell all the properties on the market. Anything below five months is indicative of a tight market. The NAR’s report showed that properties remained on the market for 18 days on average in June, about the same as in May.
In separate data, residential starts fell 8% last month to a 1.4 million annualize rate according to data from the Census Bureau and Department of Housing and Urban Development. The retrenchment in June was a surprising reversal from the jump in May when builders were very busy. Limited resale inventory coupled with builder incentives helped boost more buyer interest for new homes in May. Though June took some of the wind out of their sales, homebuilders are still breaking ground at a pace that is above the pre-pandemic trend. The National Association of Home Builders/Wells Fargo gauge in July rose to its highest level in 13 months. It was the seventh consecutive month of gains in that metric. Sentiment increased the most in the Northwest and West regions while moderating in the Midwest and the South.
Whether it is retail or home sales, the key is income, and income comes from jobs. The Labor Department said that initial jobless claims fell by 9,000 to 228,000 in the week ended July 15, the lowest level in two months. The numbers suggest that the labor market remains strong as businesses hold onto employees even as payroll growth has moderated the past few months. Before the unemployment rate moves higher, the number of new payrolls created has to drop. And the first indicator that is coming would be a rise in the weekly initial filings which just has not happened yet. While week-to-week volatility can be expected especially with weeks including holidays, the four-week moving average fell to a six-week low of 237,500 suggesting the trend is definitely in favor of less layoffs, not more. These figures show that the Fed, which is going to meet next week to determine its next monetary policy steps, still has work to do to help keep inflation under control. Though recent data points have shown prices falling for both consumer and producer prices, it only takes a few months of higher input costs to turn things around. For example, on Monday, Russia announced it was pulling out of a deal to facilitate the export of millions of tons of grain from Ukrainian ports. The deal had been in place since July 2022 and had stabilized commodity prices since then. In the past five days, wheat prices are up 15% and natural gas, a key input source for energy production, up 9%. That is why it is very likely the Fed will increase its federal funds rate to a range of 5.25%-5.50%, an increase of 25 basis points.
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