Highlights for this week include:

• August retail sales, industrial production, and housing starts are all consistent with further economic growth. Indeed, the Atlanta Federal Reserve (Fed) GDPNow model estimates third-quarter economic growth of a healthy 2.9%.
• The Fed began lowering short-term interest rates with a significant 0.5% cut, signaling its support for the labor market and economy with inflation now approaching its 2.0% target.
• Stocks are responding positively, with the S&P 500 reaching a new all-time high during Thursday’s trading, encouragingly led by economically sensitive cyclical stocks.

Retail Sales, Industrial Production, and Consumer Sentiment Consistent with Healthy Economic Growth

Retail sales rose a modest 0.1% in August, but this was after a healthy 1.1% gain in July. This was better than expected and kept the three-month average pace near steady. It suggests that consumer spending on goods so far in the third quarter remains resilient, despite softening in the labor market. As a sign of consumer resiliency, discretionary purchases, including online, sporting goods and hobbies, health and personal care, and miscellaneous sales, all rose from the prior month.

On a y/y trend basis, retail sales increased 2.3%, remaining range-bound for over a year, despite the Fed keeping interest rates high. With the Fed now lowering interest rates, this could boost consumer demand, supporting the case for continued economic growth in the months ahead.

Industrial production rebounded a stronger-than-expected 0.8% in August, nearly reversing the drop in the prior month, which was partly due to weather (Hurricane Beryl) and the temporary shutdown of auto plants for maintenance. Vehicle output jumped by almost 10%, more than recovering from the decline in July and the biggest contributor to manufacturing output growth. Mining output also rebounded, while utilities were flat.

Along with the rise in production, the capacity utilization rate recovered to a higher-than-expected 78.0%. Nevertheless, it is still lower than a year ago and below its long-term average. This suggests that there is production slack in the economy, which tends to be disinflationary - consistent with the Fed lowering interest rates.

The University of Michigan Consumer Sentiment Index increased to the highest level in four months and exceeded expectations. Both current conditions and consumer expectations improved. Despite the cooling in labor markets, consumers felt more optimistic about their personal finances and the economy a year from now.

Housing Shows Signs of Life and Should Further Benefit from Fed Rate Cuts

Housing starts rebounded 9.6% in August to a higher-than-expected 1.356 million annual rate. Three of the four regions posted gains, led by double-digit increases in the South and the Midwest, giving credence to the argument that at least some of the weakness in the prior month was due to Hurricane Beryl and other weather distortions. Single-family starts surged 15.8%, the most since June 2020, while multifamily pulled back 6.7%.

The overall level of starts is still subdued and far below prior highs, but a favorable macro backdrop suggests an upturn in trends. With mortgage rates already coming down and the Fed now lowering interest rates, housing starts will likely continue to improve in the months ahead. Historically, starts have risen more than 10% on average in the year after a first Fed rate cut.

A positive housing outlook is also supported by the 4.9% rise in building permits in August, the most in a year, to a better-than-expected 1.475 million annual rate. Single-family permits finally showed a marked increase, with gains across all four regions, after more than a year of lackluster activity. If sustained, the increase in homebuilding activity should alleviate the housing shortage and support a continued economic expansion.

Thoughts On Recent Market Dynamics

The Federal Reserve began lowering interest rates on Wednesday with a significant 0.50% cut to short-term interest rates, its first cut since the start of the pandemic in 2020. The long-anticipated move follows the inflation battle the Fed began in early 2022. This move signals the Fed is committed to supporting the labor market and economy, with inflation now approaching its 2.0% target.

After ending the day lower after Wednesday’s announcement, stocks are rallying strongly as of this writing on Thursday, with the S&P 500 reaching a new all-time high. Encouraging, cyclical stocks, closely tied to economic growth, are reacting favorably after lagging the defensive sectors heading into the Fed’s announcement.

Given the positive economic growth that we continue to see and the fact that corporate profits and future estimates remain sturdy, we are encouraged by the recent market action after the August selloff. Stay tuned for future updates as things develop.