Current economic readings, including retail sales, industrial production, and jobless claims, remain consistent with a growing economy.

However, leading economic indicators, including the Conference Board’s Leading Economic Index, building permits and homebuilder sentiment, suggest further economic weakness ahead. This has us remaining cautious on stocks and other risk assets.

Current Economic Readings Consistent with Growth

Retail sales rose 1.3% in October, the most since February. The increase was broad-based across categories, led by a 4.1% jump in gas station sales, partly due to higher gasoline prices. Vehicle sales rebounded 1.3%, with both volume and prices up. Excluding gasoline and vehicles, retail sales rose 0.9%—the most in four months and more than double the 0.4% average monthly change since 1992. It shows consumer demand holding up well at the start of the fourth quarter.

On a y/y trend basis, retail sales increased 8.9%, while discretionary and core discretionary sales were up 8.1% and 7.1%, respectively. All measures have changed little over the past several months. Although most of the increase in these series continues to reflect still-elevated goods price inflation, it also shows that consumer demand is holding up. Demand has been supported by continued payrolls growth, nominal wage gains, accumulated savings during the pandemic, and utilization of consumer credit. Continued resilience in consumer spending argues against an imminent recession.

Industrial production fell 0.1% in October, down in two of the past three months, and contrary to the consensus of +0.1%. On a y/y basis, industrial production increased 3.3%, while manufacturing output was up 2.4%, both the slowest rates since January. The deceleration comes amid tighter Fed policy, a stronger U.S. dollar, and weaker demand from abroad. Nevertheless, such rates of production growth are not consistent with recession.

Jobless Claims Show Strong Labor Demand

Jobless claims give a timely and accurate snapshot of the labor market and economy, and we pay close attention to them. Initial claims for unemployment insurance fell 4,000 last week to 222,000, and close to its pre-pandemic level. Despite reports of impending layoffs and hiring freezes in the tech sector, the persistently low level of initial jobless claims shows that labor demand, in aggregate, remains strong.

Housing Weakness Continues

Homebuilding activity remained under downward pressure in October amid high mortgage rates, depressed housing affordability, and plunging builder confidence. Housing starts fell 4.2% from the previous month to a 1.4-million-unit annual rate, the second lowest level since August 2020. Three of the four regions posted double-digit declines. The one exception was the South, where starts rose 6.7%, reflecting rebuilding activity in the aftermath of Hurricane Ian.

Homebuilding permits are also falling, down 2.4% last month to a 1.5-million-unit annual rate. This is the lowest level since August 2020. On a y/y basis, housing starts declined 8.8%, while permits were down 10.1%. We expect homebuilding activity to remain weak into 2023, as implied by the deepening pessimism among homebuilders, with the Housing Market Index sinking in November to its lowest level since 2012, outside of the pandemic.

Existing home sales fell 5.9% in October to a 4.4-million-unit annual rate, the lowest level since May 2020. This was the ninth consecutive monthly decline in home sales, the longest negative stretch ever. On a y/y basis, sales were off 28.4%, its steepest rate of decline since February 2008. All four regions declined versus a year ago.

Leading Index Continues Falling

The Conference Board’s Leading Economic Index fell 0.8% in October, double expectations. It was the eighth straight decline, the longest streak since the 2008 financial crisis. Only three of the 10 components increased. Over the past six months, the index has decreased 3.2%, indicating a high risk of recession in the near term.

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