Retail Sales Rose for Fourth Straight Month Americans increased their retail spending in July, as consumers continue to open their wallets and bolster the resilient U.S. economy.
Retail sales rose a seasonally adjusted 0.7% in July from the prior month, the Commerce Department said Tuesday, an acceleration from June’s 0.3% gain. Unrounded at 0.729%, July’s pace was the fastest since January.
The retail sales gain also was higher than the 0.2% increase in consumer prices last month, a sign that Americans’ spending is outpacing inflation. (…)
In July, shoppers also increased their outlays at grocery and hardware stores. A measure of online spending rose 1.9% in July, a month that saw Amazon.com’s Prime Day summer promotion.
Sales declined at auto dealerships and electronics and furniture stores, which are sensitive to higher borrowing costs. (…)
Americans keep buying goods:
Core sales (ex Autos) also exceeded expectations by registering 1.0% growth in July, defying the forecasted 0.3% decline. Core retail sales are up 2.2% compared to July 2022.
But Control Sales, an even more “core” view of retail sales which excludes motor vehicles & parts, gasoline, building materials and food services & drinking places and which feeds directly into GDP data, also jumped 1.0% MoM in July after rising 0.5% per month in each of the previous 3 months. Control sales are up 4.8% YoY but have been rising at a 7.9% annualized rate in the past 4 months.
Spending in restaurants and bars, a true discretionary expenditure, rose 1.4% MoM in July. it is up 11.8% YoY but rose at a whopping 13.2% annualized rate in the past 4 months, +15.8% in the last 3 months!
Hence: the latest Atlanta Fed GDPNow tracker now sees Q3 GDP growing at a 5% clip.
The Fed may not be done…
Is It Time to Worry About Consumer Debt? Consumers are still flush with cash but are more often falling behind on some payments, making for a complex picture.
Until very recently, the rate of late payments had trended below historical norms across virtually all lending types and consumer groups. A frequent explanation is that Americans built up a cushion of extra cash savings during the pandemic and still haven’t spent it down.
The good news is this looks to still be the case. According to anonymized and aggregated account data tracked by the Bank of America Institute, the median savings and checking balances were at least 30% higher in July than they averaged in 2019. Notably, balances are highest on a relative basis among households with lower income levels.
Yet the frequency with which people are becoming late with payments on their debts for some kinds of loans is returning not just to prepandemic levels, but even moving beyond them. The percentage of credit-card and auto-loan balances transitioning into delinquency—that is, going from current to becoming 30-days-plus late—is happening at a pace faster than that of 2019, according to the Federal Reserve Bank of New York’s recently released second-quarter Quarterly Report on Household Debt and Credit, which is based on a nationally representative sample of anonymized Equifax credit data.
Where the stress appears the most acute is for borrowers with poor credit records. The 60-day-plus delinquency rate for subprime auto loans rose to 5.37% in June, according to S&P Global Ratings’ latest composite performance tracker for U.S. auto loan asset-backed securities. That is well above the 0.49% June rate for prime loans in the tracker, and the highest June level ever for subprime.
However, consumers aren’t moving into financial distress at the same level they did when card or auto delinquencies were last occurring at those paces. The number of consumers facing new foreclosures and bankruptcies is still at levels well below the prepandemic period. (…)
One thing that is different for many consumers today versus prepandemic is their student-loan debt. Many borrowers are in forbearance periods on their government loans, reducing that burden on their budgets. But those payments are set to resume in October. Still, student-loan debt overall has been declining. Student-loan balances contracted by $35 billion in the second quarter, the biggest quarter-over-quarter drop in at least two decades, according to the New York Fed’s household report data. These loans represented 9.2% of all consumer debt in the second quarter, the lowest share since 2013. (…)
[Mortgage] payments are near record lows as a percentage of median household income, at just 21%, according to Black Knight. (…)
Two charts that may explain:
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Delinquency rates are almost back to their pre-pandemic levels but reman well below historical levels:
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The high credit levels as a percent of disposable income should prove painful as interest rates rise but low fixed mortgage rates have created a big, lasting cushion
Canada Inflation Quickens to 3.3% But Core Measure Shows Progress
The consumer price index rose 3.3% from a year ago, the first reacceleration since April, Statistics Canada reported Tuesday in Ottawa. That was faster than the 3% forecast by economists in a Bloomberg survey. On a monthly basis, the index rose 0.6%, double their expectations.
Canada’s headline rate is now above that in the US for the first time in three years. But the uptick is watered down by some easing in core measures. Two key yearly metrics tracked closely by the Canadian central bank — the so-called trim and median core rates, which filter out extreme price fluctuations — eased, averaging 3.65% from a downwardly revised 3.7% a month earlier. (…)
A three-month moving average of the measures that Governor Tiff Macklem says is key to his team’s thinking fell to an annualized pace of 3.49%, from an upwardly revised 3.91% previously, according to Bloomberg calculations. That’s the slowest rate of increase since October 2022. (…)
The latest inflation print with cooling core measures — along with recent signs of softening in the economy and labor market — may pave the way for policymakers to return to pause mode as early as their next meeting on Sept. 6. The majority of economists expect the central bank to hold the overnight rate steady at 5% next month. (…)
Services inflation rose to 4.3% in July from 4.2% one month earlier. (…)
Grocery prices grew at a slower pace year over year, rising 8.5% last month after a 9.1% increase in June.
On a monthly basis, higher prices for travel tours and air transportation led the gain, jumping 15.5% and 13.6% respectively, with July being a peak travel month. (…)
RENT RANT (3)
I don’t pretend to be an expert on rent, although I was among the few to warn about the coming rentflation in 2021 and among the few to warn that rentflation was not as transitory as many believe since mid 2022. I once again see a need to curb the widespread enthusiasm that rental stats are about to solve the inflation problem.
The San Fran Fed’s August 7 paper has fueled the belief that rents are falling fast and will soon bring headline and core inflation measures within the Fed’s target, prompting the FOMC to adopt a much easier monetary policy.
In this Economic Letter, we forecast the path of CPI shelter inflation over the next 18 months by combining data from various market indexes that measure shelter inflation and housing markets. Our results suggest that the recent slowdown in asking rents and house prices is likely to slow shelter inflation significantly in the future, although substantial uncertainty surrounds these forecasts. (…)
In our model, we evaluate how well we can predict the evolving cost of shelter based on monthly data for lagged year-over-year growth from the Zillow Home Value Index, Zillow Observed Rent index, Apartment List National Rent Index, Apartment List Vacancy Index, CoreLogic Single-Family Rent Index, S&P/Case-Shiller U.S. National Home Price Index, and past CPI shelter inflation. (…)
Our sample covers the period from March 2018 to April 2023. (…)
The dashed line in Figure 3 presents our baseline forecast of year-over-year shelter inflation over the next 18 months based on the average of cumulative shelter inflation forecasts at the CBSA level. (…)
The limited model does not forecast a deflationary episode in 2024, although it does suggest that year-over-year shelter inflation will hit zero around summer 2024. Critically, both models agree that shelter inflation is likely to slow significantly over the next 18 months. (…)
There are several important caveats to these forecasts. First, the range of possible forecast errors is quite wide, with year-over-year shelter inflation in late 2024 estimated to fall anywhere from about –9% to about 2% in our baseline model, and –2% to 5% in our limited model. This suggests significant uncertainty in the forecasts. However, even the more modest predictions shown by the upper value of the range of estimates would represent a slowdown in shelter inflation.
A second caveat is that these models are estimated primarily on data from the pandemic period, which saw exceptional growth in housing markets and inflation. The relationship between these housing market indicators and shelter inflation could therefore be different going forward. This introduces additional uncertainty for our projections, beyond that reflected in the shaded confidence regions. (…)
The forecasts we present in this Economic Letter indicate that future shelter inflation may decline considerably, reflecting the signals of slowing in recent rental markets. At a minimum, our results imply that the risk of surprise increases in shelter inflation has become significantly smaller with the rapid rise in interest rates since early 2022.
But there more caveats:
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Their sample covers the period from March 2018 to April 2023, partly because rent data aggregation is fairly recent.
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The model is based on measures of “asking rent” on new leases which only account for less than 10% of the actual rental market. The Census Bureau estimates that only 8.4% of Americans move in a given year (last data point in 2021). The proportion of “new leases” is thus very small against “renewals” which represent 90%+ of the market and are not included in any of the measures used by the San Fran Fed analysts.
Recent work by the Cleveland Fed observed that a so-called New Tenant Repeat Rent index (NTTR) leads the BLS-Rent data by 3 quarters at YoY turnings points, using a rather limited sample. Apartment List’s National Rent Index peaked in Q4’21 and turned clearly down in Q1’22. This cycle, the BLS CPI-Rent index turned down in Q2’23. Unknown, however, is where both series are heading to at their next turning points.
July’s Apartment List NRI is down 0.7% YoY, noting that “seasonal trends suggest that monthly rent growth will continue to slow for the remainder of the year, so it is likely that annual rent growth will sink further into negative territory in the months ahead.”
On a MoM basis, the NRI is up 2.7% YtD, a slower pace than every previous year measured by the index, aside from 2020. Unfortunately, again, the sample is vry small.
Recall that the above refer to new, move-in rents as opposed to renewals.
Since WWII, CPI-Rent has never been negative on a YoY basis except for 2 months after the GFC (and only barely). The SF Fed models thus defy history.
Fortunately, we have some real world data to work with:
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RealPage’s June monthly rent data showed a 1.5% YoY increase for blended rents, down from +2.3% in May and +15.7% at its March ‘22 peak.
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New lease growth decelerated 40bps to 4.3% YoY while renewal lease growth slowed by 30bps to +6.2%.
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Amid strong new supply, the sunbelt’s occupancy held up well (down just 10bps to 93.8%) while coastal occupancy was unchanged at 95.7%.
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ISI notes that a sizeable portion of the projected deliveries have been pushed out and are now likely to hit the markets in 2024 (vs. 2023). Still, the existing pipeline for the next 2 years is equal to 5.7% of the existing inventory. More than 60% of the new apartments are in the major Sunbelt markets.
Among public companies:
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Tricon Residential owns 37k single-family homes across the U.S. Sun Belt. During Q2’23, it signed new leases averaging 13.4% rent increase and renewals averaging 6.5% increases.
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During the same quarter, Invitation Homes (82k units) saw new rents up 11.0% and renewals up 9.1%. American Homes: +10.6% and 7.5% respectively in spite of a 28.5% annualized turnover.
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All 3 companies operate in the Sun Belt where the bulk of new apartments are being built owing to strong population and job growth and above average income levels.
Other facts:
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The S&P/Cas-Shiller National Home Price Index is up 40.5% from its April 2020 level and has recently turned back up. New houses sold 34% above their April 2020 average price level. The CPI-Rent index is up 17.7% meanwhile.
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Rental demand is boosted by rising home prices and mortgage rates:
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The median American household would need to spend 46.4% of their income to afford payments on a median-priced home in the US, the highest % on record with data going back to 2006.
Much is written about the lags in the BLS Rent data. The July rent growth rate was down to 0.41% MoM (5% a.r.), still well above the 0.31% (3.7% a.r.) average monthly advance between the more normal 2014-19 years.
Time will tell how good the San Fran Fed’s formulas are at predicting rent growth.
For my part, understanding that people need living spaces and generally buy or lease what they can reasonably afford, I note that CPI-Rent is 99.8% correlated with wages since 1985…
Here’s the YoY growth rates since 1989. The pandemic has uphanded the relationship but wage growth is in the 5% range.
Since February 2020, wages are up 20.5% while CPI-Rent is up 18.2% even with all the lags.
It seems simpler, and wiser, to focus on wages. The Atlanta Fed wage growth tracker adjusts for compositional biases. Its 3-month moving average ticked up to 5.7% in July.
Previous Rent Rants:
Home Prices Drop in China at Faster Pace Second month of declines adds to evidence of weaker market
New-home prices in 70 cities, excluding state-subsidized housing, fell 0.23% last month from June, when they slipped 0.06%, National Bureau of Statistics figures showed Wednesday. Prices slid 0.47% in the secondary market, according to the data. (…)
Last month’s price decline was widespread, with 49 cities out of the 70 tracked by the government seeing new-home values drop from a month earlier, the most this year. In the existing-home market, where prices are less subject to government intervention, they fell in all but seven cities.
Shenzhen, a bellwether city in the south, saw prices slide 0.9% in the secondary market, trending closer to the level in June last year after Covid lockdowns halted economic activity. (…)
The value of residential sales nationwide tumbled 43% in July from June to 654.5 billion yuan ($90 billion), the weakest monthly sales in almost six years, according to Bloomberg calculations based on separate official data Tuesday.
Goldman Sachs says that seasonally adjusted house prices in the primary market declined 2.5% MoM annualized in July, accelerating from -2.2% in June. Very dangerous!
(…) The government last month indicated that July’s figure would probably increase, setting another record. Then suddenly on Tuesday, officials said they would pause publishing the data, citing the need to iron out the method for how it is assessed. (…)
Numbers showing the amount of land developers bought and the price they paid have been missing from the monthly release. The data series goes back to 1998. The move came as the amount of land sold for development slumped more than 50% last year.
That decline indicated the housing crisis was worse than the government has said. Local government revenue from land sales last year only fell 23%, according to official figures.
Another curious data point is the amount of money the government holds in official foreign exchange assets, which has held remarkably steady since 2017. That’s despite China running an increasingly large trade surplus over that period, which should have led to an increase in reserves.
Brad Setser, the former US trade and Treasury official, suggests that half of the actual reserves are “hidden.” Many of the nation’s reserves don’t show up in the official books of the People’s Bank of China because they’re stashed in “shadow reserves,” appearing among the assets of entities such as state commercial lenders and policy banks, he said.
Despite the growing trade and current account surplus, the currency has also been stable, indicating that some of that money is likely being used to intervene in currency markets.
Even some data from the private sector has become unavailable. In March, the bond market was plunged into chaos after fixed-income brokers stopped supplying aggregated bond quotes to data vendors long relied on by traders. Transactions plunged by 30% to 60% from one day to the next after the two-day halt, which some media said was due to regulators trying to address data security concerns.
In May 2022, the main bond trading platform for foreign investors quietly stopped providing data on their transactions after record outflows in the nation’s $20 trillion debt market.
Some corporate registration data are also no longer available to overseas clients. (…)
Cremations in one of China’s most-populous provinces surged by 72.7% year-on-year in the first quarter, Chinese financial media outlet Caixin reported in July, citing official data released by Zhejiang province.
That gave a rare insight into the scale of mortality after the government’s sudden relaxation of coronavirus restrictions in December. And then the data vanished. The official statement was later removed from the internet, and Caixin deleted its report on that release.
Since April 1, overseas access to parts of the popular academic database China National Knowledge Infrastructure has halted. That means foreign academics can no longer access Chinese dissertations, patents, statistics and conference proceedings, the University of California, Berkeley said in an online notice. (…)
It isn’t just economic data that’s harder to come by. Official biographies of senior politicians and officials have shrunk, with the new format only giving basic personal information in a few sentences instead of the detailed resumes that were common before.
There’s also been at least three months when the Communist Party didn’t publish a readout from its top decision-making body since Xi took a third term last October. The Politburo normally meets every month and releases a statement with some details of what was discussed. That didn’t happen last November, January or May. (…)
Stock exchanges issued the so-called window guidance to several large mutual fund houses, telling them to refrain for a day from selling more onshore shares than they purchased, according to the people who asked not to be identified discussing private information. The instructions were relayed to fund managers through investment executives at the firms, they added. (…)
The authorities issued similar instructions to investment firms several times last year, according to the people. (…
After the authorities were said to have made a similar request in September, the CSI 300 gauge plunged about 10% in the following few weeks to reach the lowest in over three years.
John Authers: China Sneezes, But Will the World Catch a Cold? The security blanket that Chinese expansion gave to the global economy for the past two decades is being pulled away.
(…) On several occasions over the last two decades, a big release of credit in China has raised boats across the world.
But now, economic woes are proving way deeper than initially feared (or desired). (…)
Bloomberg Economics suggests that fears are overstated, and that a cushioned decline in China’s growth would have only a “limited impact on the US economy.” In a downside scenario where China under-delivers on stimulus and growth spirals down, the Fed could be tipped into rate cuts sooner than expected. (…)
Even so, the medium-term outlook could ostensibly be seriously bearish for investors. Markets have already had to get used to the end of the “put” from the Fed as the lender of last resort. If they also have to survive without the Chinese “put” as the buyer of last resort, a lot of cosy assumptions from the last two decades come into doubt.
Win Thin, global head of currency strategy at Brown Brothers Harriman, suggested that China could muddle through in the short term. But:
Longer-term? Not so much. With debt/GDP approaching 300%, there are limits to returning to the old debt-fueled stimulus. Furthermore, China can no longer grow their way out of their problems as it struggles to meet its target for this year ‘around 5%.’ Besides the obvious downside risks to global growth, we don’t yet have a firm grasp of the potential global financial impact from a debt event in China but that is clearly the big “known unknown.” As always, the big ‘unknown unknowns’ elude us until it’s too late.
(…) The monthly Bank of America Corp. survey of global fund managers was published Tuesday, and charts of the evolution of what respondents label the “biggest tail risk.” From 2013 to 2016, the Chinese economy and the danger it would crash headed the list, while trade war with the US dominated attention for the years before the pandemic.
Now, however, fund managers are still much more worried about global inflation. A Chinese hard landing didn’t even make the top five perceived risks. That’s strange, given that such a scenario looks a much more imminent threat now than a decade ago, when China seemed to be the sum of all fears. (…)