Zacks Investment Management

In the latest edition of Steady Investor, we explore market updates and essential points for investors to keep in mind, such as:

• The U.K.’s inflation problem
• Busy U.S. housing market
• Strength in the U.S. labor market
• The rise in retail spending

The U.K.’s Inflation Problem Isn’t Getting Better – Inflation is a global problem, but in the realm of developed market economies, it doesn’t get any worse than in Britain. According to the U.K. statistics office, consumer prices rose 8.7% year-over-year, with core prices (which exclude food and energy) climbing to 7.1% – an increase of April’s year-over-year increase of 6.8%. Looking under the hood, some of the price increases being experienced in Britain are staggering. Food inflation was up 18.7% in May, with the prices of milk, cheese, and eggs rising at a 27.4% annual clip. The price of air travel, recreational goods, and used cars are also pressuring consumer prices higher, as these categories added the most to the headline figure in May. All told, core inflation rose at its fastest pace since March 1992, and is moving in the wrong direction. These price pressures have forced the Bank of England to become an outlier among other global central banks. As the Federal Reserve pauses rate increases and other banks downshift to smaller rate increases, the Bank of England raised its key interest rate by 0.5% at its Thursday meeting, bringing the lending rate to 5% – roughly in line with the U.S. While the Federal Reserve is hoping to pursue only modest rate increases from here in hopes of perhaps avoiding recession, the Bank of England appears more resigned that a recession is what’s needed to get prices under control.¹

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U.S. Home Builders are Staying Busy – With 30-year mortgage rates still hovering around 7%, many existing homeowners are very reluctant to put their houses on the market – a phenomenon some economists have referred to as “golden handcuffs.” Why sell a house with a very low mortgage rate only to buy a new one with a much higher rate? This dilemma has created an opening for home builders. Since the market for existing home sales is tight, but demand for housing is still strong, much of that demand can be directed to new single-family homes. It follows that U.S. home builders are breaking ground on more and more new projects. In May, housing starts rose to an annual rate of 1.6 million, the fastest pace in a year. There is also strong activity in the multi-family construction market since many would-be homeowners are choosing to rent given mortgage rates are high. Multifamily construction has been running at its fastest pace since 1986, with the total number of units under construction matching the highest-level dating back to 1970.³

Single Family (blue) and Multi-Family (red) Housing Starts

Source: Federal Reserve Bank of St. Louis⁴

The Hiring Boom’s Hidden Data Point: Fewer Hours – Much has been made of the ongoing strength in the U.S. labor market, with payrolls growing at a strong clip throughout 2023. But there’s another data point in labor that is getting less attention, and may suggest more softness in the jobs market than meets the eye. There are more jobs, but employees are working less. According to the Labor Department, the average number of hours per week fell to 34.3 in May, down from a peak of 35 hours in January 2021. There may be two takeaways from this data. The first is that employers may be cutting back hours in anticipation of an economic slowdown looming. The other may have to do with worker disengagement.⁵

New Jobs (red) and Average Weekly Hours Worked (blue): February 2020 to present

Source: Federal Reserve Bank of St. Louis⁶

U.S. Consumers Log Another Strong Month – The U.S. consumer won’t quit. One of the downstream effects of abundant jobs in the U.S. economy is that consumers have more dollars to spend. And that was evident in May’s retail spending data. According to the Commerce Department, spending in May rose at a seasonally adjusted 0.3% rate, a fairly steady carry-through from April’s 0.4% solid advance. Spending appeared to be sturdy across many categories. Consumers spent more at grocery stores, on furniture and electronics, and even at auto dealerships and home improvement stores. For those who expected a post-pandemic stimulus pullback in spending, it just hasn’t happened yet.⁷

Retail Sales & Food Services Sales  

Source: Federal Reserve Bank of St. Louis⁸

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