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What The Heck is Going On? Chapter 873 — Another week, another round of perplexing signals about the health of the U.S. economy.
The latest came Tuesday morning with reports on housing construction and manufacturing. The latter suggested healthy momentum heading into the summer, while the former reflected an economy straining under the weight of rising interest rates.
It’s confusing — as we’ve written a bunch here. But it’s also not all that unexpected as U.S. growth continues to downshift, says Guy Berger, principal economist at LinkedIn. Stay with us.
The data: U.S. housing starts came in weaker than expected in July, falling 9.6 percent to a 1.4 million seasonally adjusted annual pace, the weakest reading since February 2021. “There is no question that the housing sector is weakening sharply,” said Amherst Pierpont chief economist Stephen Stanley.
At the same time, the Federal Reserve’s industrial production index, which measures factory, mining and utility output, jumped 0.6 percent in July, driven by a rise in manufacturing activity, primarily in auto production. That was the strongest pace since March.
The report “shows the third-quarter real GDP is off to a solid start, despite a big drag this quarter from much weaker homebuilding and sales activity,” said PNC senior economic adviser Stuart Hoffman.
Will that persist? It’s doubtful, economists said, as high inflation, rising interest rates and weakening domestic demand (and a China slowdown, and a recession in Europe and …) continue to weigh on industrial activity. Other recent data point to weaker factory orders later in the year; tomorrow’s Philadelphia Fed Manufacturing Survey could offer more clues.
Mixed bag: It’s true that there’s a lot of weird stuff happening in the economy that’s difficult to explain — e.g. last month’s gangbusters jobs report, which followed news of a second straight quarterly decline in GDP.
But some of this is normal in a low growth environment, Berger said. The bottom line: “Data is noisy.”
In any given month, you’re going to get some data that suggests you’re being too pessimistic about the economic outlook, he said, and other data that signals things are much worse.
“We don’t really notice it when the economy is hot,” he said of the diverging data, because the numbers range from looking pretty good to downright amazing. Now that we’re closer to slow growth mode, “you’re going to periodically get data that’s like, ‘Wow, that looks bad.’”
IT’S WEDNESDAY — We’re closing in on Labor Day, but the weather is blissful. Enjoy those last few weeks of August! And send us a tip (or story idea, or feedback) at [email protected], [email protected] or [email protected].
Federal Reserve Governor Michelle Bowman speaks at the Technology, Innovation, and Financial Services At the VenCent Fintech Conference at 9:30 a.m. … Federal Open Market Committee minutes released at 2 p.m. … Bowman speaks again at 2:20 p.m. on COVID-19 and the role of women in the U.S. economy
BIDEN MAKES IT OFFICIAL — Our Adam Cancryn and Olivia Olander: “President Joe Biden on Tuesday signed a historic climate, health care and tax bill, saying his administration is in ‘a season of substance’ after the legislation lingered on his domestic agenda for more than a year.”
WHAT’S IN A NAME? — An SEC plan to crack down on funds that call themselves one thing but invest like another is generating some heavy blowback from Wall Street’s biggest investors. In a statement Tuesday, Investment Company Institute President and CEO Eric Pan called the regulator’s proposal to expand what’s known as the Names Rule — to cover funds purporting to be focused on ESG factors — “a blunt instrument that would place enormous costs on funds to comply with this new, complex regime.”
The SEC floated the changes in May as part of a broad initiative aimed at “greenwashing.” But ICI’s Pan warns the proposal could lead to unwanted tax implications for investors, funds dumping positions at “fire sale prices” and industry costs of upwards of “an astronomical $5 billion.” “The proposal wrongly attempts a wholesale restructuring of a system that is broadly sound,” Pan said. “It should be discarded.” — Declan Harty
MERGER:FIRST IN MM — The Community Home Lenders Association and the Community Mortgage Lenders of America are merging. The new joint organization will be called the Community Home Lenders of America, with Scott Olson as executive director and Rob Zimmer and David Horne in government relations positions. “More members mean more resources and a larger megaphone to carry on the fight to maintain [independent mortgage banks’] market leadership in mortgage lending and servicing, particularly for minority and underserved borrowers,” Olson told MM. — Katy O’Donnell
A TIDAL WAVE OF PANDEMIC AID FRAUD — NYT’s David Farenthold: “The federal government has already charged 1,500 people with defrauding pandemic-aid programs, and more than 450 people have been convicted so far. But those figures are dwarfed by the mountain of tips and leads that investigators still have to chase.”
WALL STREET’S RECORD WHATSAPP FINES — By Stefania Spezzati, Matt Robinson, and Lydia Beyoud: “Record fines that the world’s biggest investment banks are expected to pay in the coming months reflect years of frustration among US regulators that their investigations were being hampered by unmonitored messaging among bankers. Investigators at the Securities and Exchange Commission and Commodity Futures Trading Commission were repeatedly hindered by firms not archiving communications as required, according to people familiar with the matter.”
BOLL OF CONFUSION — WSJ’s Ryan Dezember: “Southwestern cotton growers are abandoning millions of parched acres that they planted in spring, prompting forecasts for the weakest U.S. harvest in more than a decade and sending prices sharply higher. U.S. agricultural forecasters expect drought-struck farmers to walk away from more than 40% of the 12.5 million acres they sowed with cotton and harvest the smallest area since Reconstruction.”
MIXED BAG — WSJ’s Sarah Nassauer: “Walmart on Tuesday said it is gaining market share in some categories such as grocery as shoppers grapple with inflation, and that some Covid-19 related costs have shrunk. But higher prices have led shoppers to hold back on some purchases, prioritizing lower-margin food items, eating into profits. Walmart is also selling through a glut of inventory leading to higher discounts.”
TOO GOOD TO LAST — Bloomberg’s Brendan Murray: “For two years, the pandemic spurred Americans to buy more goods at the expense of services. That shift — which boosted everything from container shipping rates to sales of Peloton exercise bikes — looks to be grinding slowly toward an end.”
FED WARNS BANKS OF CRYPTO’S LEGAL RISK — Our Sam Sutton: “The Federal Reserve on Tuesday directed banks to notify their regulators before engaging in any new activity involving crypto startups or digital asset markets, firing a warning shot to institutions that might be operating in a legal gray area. ‘Banking organizations engaging in crypto-asset-related activities face potential legal and consumer compliance risks,’ the central bank said in a supervisory letter.”
JOHN DOE CRYPTO — Our Katy O’Donnell: “A federal court in California on Monday authorized the IRS to serve a John Doe summons on a cryptocurrency dealer as part of the agency’s effort to seek information about taxpayers who used cryptocurrency. ‘Taxpayers who transact with cryptocurrency should understand that income and gains from cryptocurrency transactions are taxable,’ Deputy Assistant Attorney General David Hubbert of the Justice Department’s Tax Division said in a statement.”
Former CFTC Commissioner Dawn Stump has joined the blockchain analytics firm Solidus Labs as a strategic adviser, where she’ll help guide the firm’s regulatory engagement and policy development plans.
Mounting concern over semiconductor demand is sending shudders through North Asia’s high-tech exporters, which historically serve as a bellwether for the international economy. — Bloomberg’s Sam Kim
Oil prices fell about 3% on Tuesdayto their lowest since before Russia’s invasion of Ukraine as economic data spurred concerns about a potential global recession, while the market awaited clarity on talks to revive a deal that could allow more Iranian oil exports. — Reuters’ Stephanie Kelly
Harvard Business School, one of the world’s most prestigious providers of business education, will offer free MBA tuition for lower-income students, responding to growing concerns in the US over higher education costs and the need for increased social mobility. — FT’s Andrew Jack