It’s Show Time!

With the November presidential election now just 19 weeks away, the battle for the White House is in full swing with the first debate between President Joe Biden and former president Donald Trump scheduled for tonight at 9:00 pm ET. The debate is expected to run 90 minutes with some new rules, such as no studio audience and muted microphones during the other candidate's turn to speak. 

Topics for tonight’s event are expected to range from border security to taxes to foreign policy, inflation, deficits and the overall health of the economy. According to reports, 57% of the adult population is expected to tune into tonight’s debate. 

While politics may be dominating the evening airways, ahead of tonight’s performance the economic calendar has a number of key releases this morning, including the May durable goods report and an updated look at Q1 GDP. 

Durable goods orders unexpectedly rose 0.1% in May following a 0.2% increase in April (revised down from a 0.6% gain initially reported). According to the median forecast, durable goods orders were expected to drop 0.5%. Year-over-year, however, headline orders fell 1.5% in May, the largest annual decline since January.

Transportation orders rose 0.6% following a 0.1% decline the month prior, due to a 0.7% gain in vehicles and parts orders. Civilian aircraft orders, on the other hand, fell 2.8% in May, the second consecutive monthly decline. Excluding transportation, durable goods orders fell 0.1% in May and increased 1.1% over the past 12 months, down from the 1.7% annual gain the month prior.

Capital goods orders fell 0.5% in May following a 0.8% decrease the month prior. Nondefense capital goods orders, meanwhile, dropped 0.9% following a 2.8% drop in April. Capital goods orders excluding aircraft and defense – a proxy for business investment – declined 0.6% in May, the most since January. Year-over-year, business investment fell 0.2%, the weakest annual pace in four months.

In other details, fabricated metals orders climbed 0.3%, and computers and electronics orders increased 0.1% in May. On the other hand, primary metals orders fell 0.4% in May, the largest decline in four months, and electrical equipment orders also declined 0.4%, a two-month low. Additionally, machinery orders dropped 0.5%, the largest monthly decline since January.

Also this morning, GDP was revised up from a 1.3% gain to a 1.4% increase on an annualized basis in the final Q1 report, as expected, and still the weakest quarterly pace since Q2 2022.

In the details of the report, personal consumption was revised lower from a 2.0% gain to a 1.5% increase in the third-round Q1 report, further below the 3.3% increase the quarter prior.

Goods consumption was revised lower from a 1.9% decline to a 2.3% drop due to downward revisions in durables consumption from a 4.1% drop to a 4.5% decline, and nondurables consumption from a 0.6% decline to a 1.1% decrease in the final Q1 report.

Services consumption, meanwhile, was revised down from a 3.9% gain to a 3.3% increase in the first quarter, a two-quarter low.

Gross private investment, a gauge of business spending, was revised up from a 3.2% rise to a 4.4% gain, a two-quarter high.

Fixed investment was revised up a whole percentage point to a 7.0% increase in the third-round Q1 report, the largest quarterly gain since Q1 2022.

Nonresidential investment, including office buildings and factories, was revised up from a 3.3% gain to a 4.4% rise, due to an upward revision in structures investment from a 0.4% gain to a 3.4% increase, and equipment investment from a 0.3% increase to a 1.6% gain in the third-round Q1 report. Intellectual property investment, however, was revised down from a 7.9% gain to a 7.7% rise.

Residential investment, meanwhile, was revised up from a 15.4% gain to a 16.0% jump, marking the largest quarterly increase since Q4 2020.

On the trade side, exports were revised up from a 1.2% rise to a 1.6% gain, while imports were revised down from a 7.7% rise to a 6.1% gain in the final Q1 report.

Finally, government consumption was revised higher from a 1.3% rise to a 1.8% increase. State and local spending was revised higher from a 2.6% gain to a 3.0% rise in the third-round first-quarter report. Also, federal spending was revised up from a 0.7% decline to a lesser 0.2% decrease, due to an upward revision in national defense spending from a 1.2% decline to a 0.9% decrease, and nondefense spending from (0.0%) to +0.6%.

Bottom Line: While topline growth continues to tell a story of “steady” activity at the start of the year, the slowdown in consumer activity coupled with weaker durable orders activity in May paints a weaker expectation for growth in Q2. Of course, for the Fed, the question remains, will a cooling of activity be accompanied by ongoing inflation relief? If so, the Committee can continue to focus on eventual easing. If not, an ongoing loss of momentum coupled with still-elevated price pressures may result in the feared scenario of stagflation. 

Also this morning, initial jobless claims fell 6k to 233k in the week ending June 22 the highest in two weeks. The four-week average, meanwhile, rose from 233k to 236k. Continuing claims, or the total number of Americans claiming ongoing unemployment, rose to 1.84M in the week ending June 15, the highest since the end of 2021.

Additionally this morning, wholesale inventories rose 0.6%, surpassing the 0.1% gain expected, and the largest monthly increase since November 2022.

On the housing front, pending home sales unexpectedly dropped 2.1% in May following a 7.7% decline the month prior. According to the median forecast, pending home sales were expected to rise 0.5%. Over the past 12 months, pending home sales fell 6.6%, marking the 30th consecutive month of decline.

Later this morning, the Kansas City Fed Manufacturing Index is expected to drop three points to a reading of -5.

Yesterday on the economic calendar, weekly mortgage applications rose 0.8% in the week ending June 21 following a 0.9% increase the week prior. The 30-year mortgage rate, meanwhile, declined slightly from 6.94% to 6.93%.

Also yesterday, new home sales plunged 11.3% in May from 698k (revised up from 634k) to a 619k unit pace, a six-month low. According to the median forecast, new home sales were expected to decline 0.2%. Over the past 12 months, new sales dropped 16.5%, the largest annual decline since February 2023. Due to a fall in new sales, the months’ supply of new homes rose from 8.1 to 9.3 months. From a price standpoint, the median cost of a newly constructed home fell 0.1% from the month prior to $417k, the lowest since April 2023. Year-over-year, however, new home prices rose 0.9% in May.                    

Also yesterday, the latest results from the Federal Reserve’s stress tests showed large U.S. banks are well positioned to weather a severe recession. All 31 banks subject to the exam this year reportedly remained above their minimum capital requirements during the hypothetical situation posed by the Fed, which assumed a 40% decline in commercial real estate prices, a 36% decline in house prices and a 10% unemployment rate.

Of course, while large institutions appear sound, many remain concerned regarding the strength and stability of midsized or smaller financial institutions given the mounting pressure on commercial real estate.

According to a recent Moody’s report, nearly one-quarter of all U.S. office space will be vacant by 2026, reducing commercial-property values by as much as $250 billion. And, as we noted earlier this month, according to Bloomberg, the majority of bank-held commercial mortgages sit on the balance sheets of institutions with less than $250 billion in assets.

Tomorrow, the May personal income and consumption report, and the PCE – the Fed’s preferred inflation gauge.

Personal consumption is expected to rise 0.3% in May and 5.4% on an annual basis, a potential uptick from the 5.3% annual gain in April and on par with a steady rate of 5.2% growth for the last three months. Income, meanwhile, is expected to rise 0.4% in May and 4.6% year-over-year, also a potential uptick – albeit minimal – from the 4.5% annual gain in April.

The PCE is expected to be flat in May following a 0.3% gain the month prior, and potentially increase 2.6% on an annual basis, a tenth of a percentage point lower that the pace reported in April. Excluding food and energy, the core PCE is expected to rise 0.1% in May, following a 0.2% gain the month prior, and potentially increase 2.6% year-over-year, a welcomed decline from the 2.8% annual gain in April.

While potentially continuing a downward descent back towards the Feds 2% target, after a bout of accelerated price pressures at the start of the year, the PCE remains above an earlier low of 2.5% in February, while the core has remained steady at 2.8% for the past three months. 

Also, tomorrow, the final University of Michigan Consumer Sentiment Index for June will be released. In the preliminary June report, consumer confidence fell for the third consecutive month to a reading of 65.6, the lowest reading since November.

Finally, on the Fed-speak front, Richmond Fed President Thomas Barkin, Fed Governor Michelle Bowman, and San Francisco Fed President Mary Daly will speak tomorrow.

-Lindsey Piegza, Ph.D., Chief Economist