Strong economic data turns recession fears into recession doubts

 Josh Schafer

Josh Schafer· Reporter Wed, June 28, 2023, 5:30 AM EDT In this article: 

Stocks surged on Tuesday, and investors indeed had reason to cheer: Strong economic data just keeps pouring in.

June consumer confidence data was the highest it’s been in 18 months. BothApril home prices and May new home sales surprised to the upside. And durable goods orders grew in May, too, even as economists had been expecting a decline.

Rewind a few weeks and you’ll find May retail sales that beat estimates and a blowout jobs report. Expand beyond traditional economic readings, and you can find more travelers passing through TSA checkpoints than 2019 in seven of the last 10 days.

Put together, economists are increasingly less worried about a recession this year. Consumers agree with that sentiment, too, with 69.3% of consumer saying a recession in the next 12 months is “somewhat” or “very likely” down from 72.2% in May, according to Tuesday’s consumer confidence report from the Conference Board.

“Consumer attitudes remain resilient,” Jefferies US Economist Thomas Simons wrote in a note on Tuesday. He added: “There are storm clouds on the horizon, but the consumer is growing tired of the expectation that a recession is imminent.”

The data continues to point to an interest rate hike in July as the Fed tries to combat sticky inflation.

On Tuesday, futures markets tied the Federal Reserve’s benchmark had priced in a nearly 77% chance of an interest rate hike at the Fed’s July meeting, per the CME FedWatch Tool. That mark remained unchanged from last week when Fed Chair Powell teased out at least one more 2023 hike while testifying in front of policy makers.

Two key data points for the Fed are expected in the next 10 days. The Personal Consumption Expenditures (PCE) index, the Fed’s preferred inflation indicator, is expected Friday while the June jobs report will come on July 7.

The early indications are that like the strong data from the past few weeks, PCE will likely also indicate the Fed’s work isn’t done.

Data on Friday is expected to show “core” PCE — which strips out the costs of food and energy — rose 4.7% over the prior year in May, unchanged from April. The Fed targets 2% inflation, on average. Over the prior month, “core” PCE is expected to rise 0.4% in May.

“The Fed has set a high bar for not raising rates again,” Oxford economics US Economist Nancy Vanden wrote in a note on Friday. “While we maintain our forecast for no additional rate increases, the risk for another hike in July is high unless incoming data show a marked slowdown in inflation pressures.

Some economists argue the uptick in housing activity alone should have the Fed leaning toward more interest rate hikes.

“The quick bounce-back in demand as mortgage rates have stabilized complicates the Fed’s fight against inflation, as prices have also started to pick up again,” Citi’s team of economists wrote in a new a note on Tuesday. “Strength in housing over the summer months would support our base case for two additional 25bp hikes by the Fed in July and September.”

But, as EY’s chief economist Gregory Daco points out, not all the economic data is positive. Initial jobless claims have started a trek higher for three weeks. When adjusted for inflation, retail sales in May were actually down about 2% compared to last year. And perhaps most importantly, inflation remains stubbornly high.

“In short, while we shouldn’t deny the wind of optimism floating over the economy, nor should we thrive on hopium,” Daco wrote.

Some economists think strong housing data makes the argument for another Fed hike. (Photo by Scott Olson/Getty Images)
Some economists think strong housing data makes the argument for another Fed hike. (Photo by Scott Olson/Getty Images)

Josh Schafer is a reporter for Yahoo Finance. Follow him on Twitter @_JoshSchafer

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