Gregory Heym is Chief Economist at Brown Harris Stevens. His weekly series, The Line, covers new developments to the economy, including trends and forecasts. Read on for the latest report and subscribe here to receive The Line in your inbox.
Today, we have the latest on consumer spending and mortgage rates. Spoiler alert: it's another good news-bad news edition of The Line.
Retail Sales Higher than Expected in July
Retail sales rose 0.7% last month, easily beating the 0.4% gain economists were expecting. Leading the way was online retailers, who posted a 1.9% increase in sales in July. Restaurants and bars remained busy last month, as their sales were 1.4% higher than in June. Compared to a year ago, retail sales were up 3.2%, just below the 3.3% increase in prices during that time.
So, this report is good news, especially since it marks the fourth straight month that retail sales have increased. And since consumer spending accounts for about 70% of GDP, this means a recession is not happening anytime soon.
How do consumers continue to buy so much stuff after more than two years of high inflation? The first reason is Americans saved a record amount of money at the start of the pandemic, and they have been tapping that savings to keep spending the past several months. The second reason is credit card debt, which hit the $1 trillion mark for the first time in the second quarter of 2023.
The July report on retail sales—combined with the continued strength of the labor market and a jump in housing starts—has economists saying the word “recession” less each day. In fact, the Atlanta Fed’s GDPNow estimate has economic growth coming in at 5.8% in the third quarter. Keep in mind that while we’re at the halfway point of 3Q23, we are only now getting July data, so a lot can still happen before the official number comes out.
While everything looks good from an economic standpoint right now, there is a bad side to this. See the next section for more information.
Mortgage Rates Hit Their Highest Level in 21 Years
According to Freddie Mac, the average rate for a 30-year conforming mortgage rose to 7.09% this week—its highest level since April 2022. At this time last year, rates were averaging 5.13%. Did you ever image a day would come when you’d be wishing rates were still at 5.13%? Me neither.
Why are mortgage rates going up when inflation is going down? Great question, and here’s where the previous item comes in. It’s great the economy is doing better than most of us expected, but that also means prospects for future inflation have gone up. Remember that 30-year rates are not based on today’s inflation, but future inflation expectations. Early in 2023, markets expected a recession in the second half of this year, and mortgage rates fell to just over 6% in early February. The improving outlook for economic growth has been pushing rates up ever since.
The lesson here is that in the world of economics, good news can turn to bad news very quickly. Better-than-expected economic growth is certainly a good thing, until it pushes mortgage rates to a 21-year high. This could lead to what economists are calling a “rolling recession,” where the overall economy is doing well but certain sectors—like housing—are in a recession.