Fed Watch – 7/12/2024

The below transcript is a literal translation of the podcast audio that has been machine generated by Notta.

Hi everyone, welcome to the July 12th edition of Fed Watch. My name is Taylor St. Germain, an economic speaker and consultant with ITR Economics. I’m filling in for Brian today, looking forward to bringing you some insight into some of the data that we’ve been watching closely as of late.

I wanted to highlight some of this weakness or some of the sluggish feeling that we’re expected to feel in the economy as we progress into this second half of 2024. The economy is losing a little bit of pressure when we look at data series like retail sales, the housing market in terms of permits and starts, and when looking at employment.

And I’ll put those three data sets in perspective for you today. But I want you to know that the economy will likely have this sluggish feeling over the next one to two quarters. And at the end, we’ll talk about what that likely means for interest rates as we move forward.

So I wanted to start off with the first data series, which is retail sales. The US total retail sales 3/12 rate of change, it had been inching higher since mid 2023, but it recently broke that trend by dropping to a nine month low in May at a positive 2.9%.

Now that retail sales 12/12, which has been edging marginally higher for most of this year, did stall out at a positive 3 .3%. Now what’s notable, especially for those of you that follow ITR is that the 312 for retail sales is below the 12/12.

And that’s a negative checking point. And that suggests that the face C slowing growth trend is going to characterize retail sales in the coming quarters. Another trend that I would highlight in retail sales is that the three month moving total, you can see more evidence of this losing pressure or this slowing feeling.

At a positive 8.1%, the seasonal rise off the March low, that’s milder than normal. And that’s a noteworthy trend for retail sales as we move forward. So we’re starting to see those signs of slowing and weakening in the overall retail sales data, which will contribute to that sluggish feeling.

And so what should retailers be aware of as a result? Well, retailers and their suppliers, they should be closely monitoring their inventories and customer traffic as we start to see some of this sluggish growth in retail sales.

So we have some slowing down in retail sales. Let’s talk about the housing market. When we look at the permits trend in the housing market, the 312 rate of change, it’s at a respectable growth rate at 9 .9%.

But the trend is in face C slowing growth as well, similar to retail sales. And further descent in that growth rate, that slowing growth is probable as we move forward into the second half of 2024. So the 12/12, the year over year growth rate is still rising, but with that 312 retreating, a trend reversal is likely in the annual growth rate as we progress forward.

The 312 has downward past the 12/12, which is similar to retail sales, and also again, a negative checking point contributing to some of this sluggish feeling in the economy in the second half of 2024.

Now that’s the permit side. Let’s talk about the start side. When we look at single family starts, we’re seeing also a year over year growth rate peak is imminent. The 3/12 once again is running below the 12/12.

And I know I’m sounding like a broken record highlighting that all these 3/12s are below the 12/12s, but that’s intentional because that’s showing some of the slowing that we’re expecting to see into the second half of 2024.

We do expect the 3/12 rate of change for single family housing starts to go below zero by the fourth quarter of this year, which is consistent with our housing starts leading indicator, our proprietary ITR housing starts leading indicator.

So we’re starting to see the month to month change in housing starts coming in weaker. And that’s been characterizing really the last three months. Now, despite this slowing trend and the 312 dropping into phase D, I’m not suggesting the bottom’s falling out of the housing market, but again, it’s contributing to some of this sluggish activity that we’re going to see as we move through the second half of 24.

Let’s talk about employment as well. Despite the fact that there were a record number of people employed in June, which is up about one and a half percent from the previous June, when we dig deeper into that data, there is some weakening in the employment data.

And that’s why it’s important not to just read the headlines but actually evaluate this data and dig into some of the weeds of the data. The 1/12 rate of change for employment has resumed its phase C slowing growth descent.

The 1 .5% year over year increase is the weakest in slightly over three years. So despite all of these headlines saying record, high employment numbers, if you really dig into the trends of the data, again, you can see some of that weakness in sluggish activity.

So what does this mean? Well, it means that there’s a lot of measurable signs of the economy slowing down as we look into the second half of 24. Now, again, the leading indicators aren’t suggesting that this turns into a macroeconomic recession, but there is clear signs of weakness and slowing that we’ll be dealing with in the second half of this year.

So what do we do? Well, first of all, I hope that everyone seizes some opportunities. Many people will be focused on the near term weakness and that is true for 24, but I want you to keep your eyes on the long term of 25 and 26 to where we have some very attractive economic growth coming our way.

So capitalize on people’s pessimism in the near term as you continue to prepare for the strength that we see in the long term. I also want you to recognize that inflation in terms of the consumer price index as well as wage inflation is likely to continue to come down in the second half of 24 in particular.

And so it’s important to rein in your expectations on that front. Now, we’re on Fed Watch here. This is all good news if you’re looking for lower interest rates because some of this sluggish economic data, the slowing down and overall inflation, the slowing down in wage inflation likely means we see interest rates moving lower in 24 and into 2025.

So be prepared to take advantage of those lower interest rates as we look forward to the second half of this year and into next year. Thanks for joining me on this episode of Fed Watch. Brian will be back with you all next week, but I hope you enjoyed your time with me here today.

And as a reminder, please like and subscribe to ITR’s podcasts, wherever you listen to your podcasts. We’ll look forward to talking to you all soon.