The so-called hard economic data is starting to raise some eyebrows

Recent economic data indicates a weakening U.S. economy, with retail sales declining 0.9% in May and housing starts falling to an annual rate of 1.265 million, both below expectations. According to Evercore ISI, housing starts above 1.20 million suggest recession is unlikely, but a drop to 1.00 million or less, potentially triggered by higher oil prices and tariffs, would signal a recession. These figures come as the S&P 500 approaches record highs, potentially jeopardizing the market's rebound if economic data continues to deteriorate.

Analysis

Recent U.S. economic data indicates a notable deceleration, with May retail sales declining 0.9%, exceeding the anticipated 0.6% fall, and housing starts dropping to an annual rate of 1.265 million, significantly below the Dow Jones estimate of 1.35 million. Building permits also missed consensus, coming in at 1.393 million against an expected 1.42 million. According to Evercore ISI, while housing starts above 1.20 million suggest a recession is currently unlikely, the weakening trend is a concern; a fall to 1.00 million or less, potentially driven by higher oil prices or cratering consumer demand, would signal a recession. This deteriorating economic backdrop contrasts with the S&P 500, which, after a 20% decline in April amidst trade tensions, has rebounded to within 2.7% of its February all-time high, a rally now potentially at risk. Echoing these concerns, JPMorgan economist Nora Szentivanyi noted that the early-year boost to economic activity appears to be fading, with rising import prices due to tariffs likely to translate into a material increase in consumer prices, even if delayed. The market awaits further guidance from the Federal Reserve's upcoming monetary policy decision and its quarterly Summary of Economic Projections for clarity on the economic outlook.

Key Decisions for Investors

• Investors should exercise caution regarding the sustainability of the current equity market rally, given the clear signs of economic weakening evidenced by declines in retail sales and housing starts.
• Monitor housing starts closely, as a sustained level below 1.20 million annually could signal increasing recessionary risk, with the 1.00 million mark being a critical threshold.
• Anticipate heightened market sensitivity to the Federal Reserve's upcoming monetary policy statement and economic projections, particularly concerning inflation and growth forecasts in light of tariff impacts and softening data.
• Re-evaluate exposure to consumer- discretionary sectors and companies heavily reliant on import supply chains, as fading economic momentum and rising tariff-related costs may pressure earnings and consumer spending.