- Retail sales in Canada and the U.S. continue to show modest increases.
- Shortages of single-family homes persist in the U.S.
- Leading Economic Indicators (LEI) continue the streak of negative readings, pointing to a recession sometime between Q3 2023 and Q1 2024.
Most major North American equity indexes showed gains, as investors remained optimistic about the economy’s prospects. The expectation that the tight labor market and controlled inflation would prevent a severe economic downturn contributed to this positive sentiment. However, the tech-heavy Nasdaq Composite experienced a slight decline. Among large-cap stocks in the Russell 1000 Index, value stocks performed better than growth stocks. European equity markets followed suit with modest gains in the week.
On Tuesday, U.S. retail and food services sales were estimated to have a slight increase of 0.2% compared to the previous month and a 1.5% increase compared to June 2022. Total sales for the three months, from April to June 2023, were up 1.6% from the same period in the previous year. Non-store retailers saw a significant increase of 9.4 % compared to last year, while food services and bars and restaurants experienced an 8.4 % increase from June 2022.1
In May, retail sales in Canada increased by 0.2%. Growth was observed in five of nine subsectors, with the most robust increases seen in motor vehicle and parts dealers (+0.8%) and food and beverage retailers (+1%). However, core retail sales remained unchanged in May, excluding gasoline stations, fuel vendors and motor vehicle and parts dealers. Retail sales increased in six Canadian provinces, particularly in British Columbia (+2.7%) and Alberta (+2.0%). British Columbia saw growth for the third consecutive month, with the Vancouver area experiencing a 2.1% increase in retail sales. On the other hand, Ontario (-0.6%) and Quebec (-0.9%) reported a decline in retail sales for the second time in three months. In specific areas like Toronto, retail sales increased by 0.9%, while in Montréal, retail sales decreased by 0.4%.2
Also, on Tuesday, the Federal Reserve reported that U.S. industrial production experienced a 0.5% decline in June, with most market groups showing decreases. The capacity utilization rate also dropped to 78.9% from the previous month’s revised 79.4%, and it has been trending down since reaching a high of 80.8% in September of last year. Key details show that manufacturing declined by 0.3% in June, following a 0.2% fall in the prior month. Motor vehicles and parts output fell by 3%, whereas it had risen by 0.8% in the previous month. Excluding autos, the total industrial output fell by 0.4%. Additionally, utilities output experienced a 2.6% decline in June, while mining output, which includes oil and natural gas, fell by 0.2% after a 1.4% decline in the previous month.3
In June, the U.S. National Association of Home Builders reported construction on new homes declined by 8%, with homebuilders shifting focus from starting new single-family homes to completing existing projects. Housing starts dropped to a 1.43 million annual pace from 1.56 million in May. Despite the slowdown, demand for new homes remains strong due to limited options in the resale market. The Midwest led the decline in construction, where housing starts fell by 33%. However, in the West, housing starts for single-family homes rose by 4.6% in June. Building permits, indicating future construction, fell by 3.7% to a 1.44 million rate. Single-family home construction fell by 7% in June, and apartment building construction fell by 11.6%. Home builders pulled back the most in the Midwest, following a surge in building in May. Despite the recent slowdown, builders had increased construction on single-family homes during spring. Demand for new homes remains high, and builders have reduced sales incentives like price cuts.4
On Thursday, the U.S. initial claims for unemployment benefits for the week ending July 15 decreased by 9,000 over the previous week to 228,000. Benefits for all programs for the week ending July 1 were 1,748,212, a decrease of 15,800 from a week earlier.5
Also on Thursday, the National Association of Realtors reported that, in June, the U.S. experienced a persistent shortage of homes for sale and strong demand from home buyers, leading to a significant increase in home prices, reaching the highest level in a year. The total number of homes available for sale in June decreased by 13.6% compared to the previous year, with only 1.08 million units available. Specifically, the inventory of single-family homes was at a record low for the month of June, with only 960,000 units. Sales of previously-owned homes also declined by 3.3% in June, with an annual rate of 4.16 million homes sold. This is the slowest sales pace in six months since January 2023 and the lowest rate for the month of June since 2009, during the sub-prime lending crisis. Compared to June of the previous year, home sales are down by 18.9%.6
The Conference Board Leading Economic Index® (LEI) for the U.S. experienced a decline of 0.7% in June 2023, following a 0.6% decline in May. Over the six-month period from December 2022 to June 2023, the LEI contracted by 4.2% – a steeper rate of decline than the previous six months (June to December 2022) when it contracted by 3.8%.
Several factors, including gloomier consumer expectations, weaker new orders, an increased number of initial unemployment claims and a reduction in housing construction, drove the decline in the LEI. This has resulted in the longest streak of consecutive decreases in the Leading Index since 2007-08, during the Great Recession. The data suggest that economic activity is likely to continue decelerating in the coming months, with a forecast of a potential recession from Q3 2023 to Q1 2024.7
Sources:
1https://www.census.gov/retail/marts/www/marts_current.pdf
2https://www150.statcan.gc.ca/n1/daily-quotidien/230721/dq230721a-eng.htm
3https://www.federalreserve.gov/releases/g17/current/default.htm
5https://www.dol.gov/ui/data.pdf
7https://www.conference-board.org/topics/us-leading-indicators
Important Information:
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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