This week’s reports showed slow economic growth, weak housing, cautious consumers, stronger factory orders and inflation that remains well above the Federal Reserve’s goal.
The economy delivered a mixed message this week. It is still growing, incomes are rising modestly and manufacturers received more orders. At the same time, housing remains weak, consumers are uneasy and everyday necessities continue to consume too much of the average paycheck.
Consumers Worry About What Comes Next
The Consumer Confidence Index slipped from 90.2 in July to 89.4 in August.
People felt somewhat better about current jobs and business conditions but became more concerned about the next six months. Fewer consumers expected employment opportunities and business conditions to improve.
A family may be managing its bills today while still worrying about what another increase in prices or interest rates could mean tomorrow.
High Borrowing Costs Weigh on Housing
Sales of newly built homes fell 10.5% in July to an annual rate of 607,000. The median sales price declined to $393,800, but lower prices were not enough to overcome high mortgage rates and affordability problems.
For prospective buyers, the monthly payment matters as much as the selling price. Weak home sales also affect builders, real estate agents, home-improvement businesses and communities hoping to attract new residents.
Aircraft Orders Lifted Durable Goods
Orders for products intended to last at least three years rose 1.1% in July—more than double the 0.5% increase economists expected.
Transportation equipment led the increase. Commercial aircraft and parts orders jumped 12.7%, defense aircraft and parts rose 4.9%, and motor vehicle orders increased 0.9%.
Airlines may be replacing or expanding older fleets, while military spending continues to support defense manufacturing. Aircraft orders are large and can vary sharply from month to month, so one strong report does not necessarily signal a manufacturing boom. It does show that businesses continue to make major investments.
Economic Growth Remains Subdued
The second estimate of second-quarter gross domestic product confirmed that the economy grew at a 1.5% annual rate, unchanged from the first estimate and down from 2.1% during the first quarter.
This is not a recession because the economy is still expanding. However, growth at this pace leaves less room to absorb another economic shock.
Slower growth can make employers more cautious about hiring, raises and expansion. That matters to workers trying to keep their incomes ahead of prices while also saving for retirement or a child’s education.
Income Rose Faster Than Spending
Personal income increased 0.4% in July, while disposable income after taxes rose 0.5%. Consumer spending increased 0.2% but was essentially unchanged after accounting for inflation.
The increase was concentrated in services such as healthcare, housing and utilities, and financial services and insurance. Spending on goods declined, including gasoline and other energy products.
Because income grew faster than spending, the personal saving rate rose to 3%. That offers a small amount of encouragement for households trying to rebuild emergency funds or save for a home, retirement or college.
Inflation Still Comes Out of the Same Paycheck
The broad Personal Consumption Expenditures Price Index was 3.7% higher than one year ago. The Federal Reserve’s core measure, which excludes food and energy, was up 3.3%.
Economists remove food and energy to identify longer-term inflation trends because those prices can change rapidly. Families, however, do not receive a separate check to cover groceries, gasoline and utility bills. Those costs come out of the same paycheck as housing, healthcare, college expenses and retirement contributions.
When necessities consume more income, there is less left to save or spend elsewhere. That is why inflation can feel worse to households than a core inflation number suggests.
Concern Is Not a Decision
Federal Reserve Chairman Kevin Warsh said inflation remains too high and suggested the Federal Reserve may have more work to do. What he did not do was commit to an interest-rate increase at the September meeting.
That uncertainty affects real household decisions. My daughter is preparing to sell her house, while I would still like to consider buying a vehicle. Whether interest rates hold steady or rise could affect the buyers interested in her home and what financing a vehicle would cost me. An expression of concern does not help either of us plan.
After years of elevated prices, Americans may reasonably want more than another warning about inflation. They want to know what the Federal Reserve intends to do.
Warning everyone about the storm is not the same as preparing for it.
Public Resources
- U.S. Bureau of Economic Analysis
- U.S. Census Bureau Economic Indicators
- U.S. Bureau of Labor Statistics
- The Conference Board Consumer Confidence Index
- Federal Reserve Chairman’s Jackson Hole Remarks
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