Current economic signals are about as clear as mud. The Atlanta Fed estimates third quarter real growth will be a soaring 5.9 percent, yet private-sector indicators point to zero growth at best.
With offsetting signals from conflicting economic reports, financial markets spent the week without a clear sense of direction.
The Week That Was
Once again, the economic news was mixed last week.
July housing data show a depressed housing market with steep declines in sales, permits, and starts.
New orders for durable goods, which surged in the spring, fell sharply in July and are up by only about 1 percent since the end of last year.
S&P’s advance survey of August business activity shows almost no increase in private business.
Overall, businesses reported muted demand, declining new orders, and ongoing inflation for both inputs and sales to customers.
Weekly unemployment data continue to show no evidence of an easing in tight labor market conditions.
Things to Come
The most important report arriving this week is Friday’s update for July consumer spending and income. If the Atlanta Fed’s estimate of quarterly growth is accurate, July spending and income will be up sharply. Without a sharp increase, economic growth for the quarter will be much lower than the Atlanta Fed’s estimate.
The June spending and income report was mixed. It shows spending and wages up at a 7 percent annual rate while incomes rose at only a 2 percent to 4 percent rate. The June report also shows monthly inflation at 2 percent for both the total and core measures.
We expect the July report will continue to show inflation moderating, but not quite as much as in June.
Most important will be the rate of increase in spending, incomes, and wages. We look for
monthly spending and incomes to be increasing in the 3 percent to 5 percent annualized vicinity, with wage increases above these levels.
Money, Money, Money
Interest rates remained relatively stable last week. They are likely to remain so, given the inconsistent economic news.
As additional signs of a weakened economy become more obvious, the Fed could do what it did two meetings ago: hold the fed funds rate steady and continue to sell securities while telling investors to prepare for another rate hike if inflation remains strong.
Market Forces
Stocks were mixed this past week. The Nasdaq and QQQ were up 1 percent, the Dow and small cap ETFs down 1 percent, and the S&P500 little changed.
Technical indicators remain moderately negative. Their 10- and 21-day averages are at or close to going below their 50-day averages.
Economic signals are about as clear as clear as mud. As noted above, the Atlanta Fed upped its estimate for third quarter real growth to 5.9 percent, indicating the economy is soaring. Our private indicators point to zero growth at best.
More consistent with our view is the advance S&P500 August business survey. It shows
manufacturing activity remains negative and service companies are close to no growth and are suffering declines in new orders.
We expect the economy to continue to weaken significantly toward year-end and into 2024.
However, if the Fed of Atlanta estimate is accurate, the economy and the Fed are about as far from containing inflation as Trump’s rivals are from overtaking him.
Outlook
Economic Fundamentals: negative
Stock Valuation: S&P 500 overvalued by 12 percent
Monetary Policy: restrictive
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