Econ Quadruple Beat

Mary MacNamara and Jose Torres, Senior Economist at Interactive Brokers, break down four major economic data surprises—from GDP and durable goods to unemployment claims and home sales. What do these signals mean for the U.S. economy, interest rates, and the housing market?

Summary – Cents of Security Podcasts Ep. 116

Mary MacNamara

Hello everybody and welcome to Interactivebrokers.com Cents of Security Podcast. I’m Mary MacNamara, and today we are talking with Jose Torres IB’s Senior Economist, about the quadruple four data points that came out, and so he’s going to talk about it and we’re going to hear it one by one. Thank you, Jose.

Hope you’re doing well.

Jose Torres

Good morning, Mary. I’m doing excellent and especially on Thursdays where we gear up and we record our weekly Cents of Securities podcast, Cents of Security, rather not securities. So, quadruple beat this morning, September 25th, GDP, second quarter upgraded to 3.8%. Folks, that is the fastest rate of growth in seven quarters since the third quarter of 2023.

So, the economy is accelerating. We’re seeing growth way better than expectations. That was a revision, but way better than expectations. Then we got a durable goods report up 2.9%, month over month, something like that. Expectations were way below that.

Mary MacNamara

Refrigerators and things like that, right?

Jose Torres

Factory equipment, automobiles. What really drives this report though, Mary, is the aircraft because they’re so expensive, so it moves the needle so much. And what happened last month in August was that you had not just passenger aircraft, which were mainly Boeing. You had passenger aircraft do really well, but you also had defense aircraft.

Passenger, which, our typical JetBlue kind of aircraft, Delta, American, where folks go to airports and get on those kinds of airplanes. And then you have the defense airplanes, which are more geared for military use. But from an economics, perspective, we tend to look more at the passenger jet category because of course that’s more that’s more indicative of where the economy is where, military Cycles are more influenced by geopolitical conditions and stuff like that. But durable goods, Mary came in at 2.9% month over month. The consensus was expecting a 0.5% contraction. Yeah. So that was a big, that was a big beat. But the best thing in that report was the second consecutive month of really strong Business investment capital expenditures and that’s a, that’s great news. The current administration’s been really focused on onshoring manufacturing production and getting firms to invest in heavy equipment and factories and semiconductor production facilities, et cetera. So we’re seeing evidence through the numbers that activity is buoyant.

However, the manufacturing sector still struggles. From an employment perspective, it’s lost jobs this year. And also from an ordering perspective, this report was good, but overall, last few years, manufacturing orders have been really sluggish and that’s really mattered because of high interest rates.

Consumers aren’t really making those purchases as much, and businesses as well, because when financing costs are that high, it constrains the volumes that can be…

Mary MacNamara

What about tariffs that didn’t? Didn’t that affect things or no?

Jose Torres

Tariffs. Yeah, they’re definitely a reason why of course there’s a risk that you’re going to have tariff fueled price pressures in the future. We haven’t seen them yet at the margins, not enough to move the inflation needle or, the overall outlook on price pressures. But we we’re beginning to see that firms to avoid the tariffs they’re doing. They’re trying incrementally doing business here, but these are, slower moving factors. We have to wait over time, see what happens. Factories aren’t built in a day, neither was Rome. And it takes time.

The other two data points were initial unemployment claims. General unemployment claims both the initial segment, which is essentially how many people were laid off. And then the continuing claims segment, which is how many people are still collecting unemployment claims because they couldn’t find work.

Both of those metrics went down. Initial claims came in at 218,000. The expectation was 235,000. So big miss. Two weeks ago, the week of Labor Day, sometimes holiday shortened weeks are very volatile. And they could have very noisy data. We had a really, we had a scare this is roughly two weeks ago.

Number came out, 263,000. So that was the highest in 47 months. Yeah, so that was a scare and markets were really worried about that wow, layoffs are really spiking. Is this just a blip or is it going to be a continuation for now, Mary? Thank God it’s just been a blip. We haven’t seen a continuation in that yesterday we got the highest, the fastest pace of new home sales in 43 months.

That was a really impressive number. That’s. Starting to add to evidence that plunging mortgage yields, mortgage rates have been coming down a lot, that motivates residential activity transactions. That’s the beginning of some evidence that those lighter yields, lighter rates are bringing buyers in.

But then this morning, that was yesterday on September 24th, this morning was September 25th, we got existing home sales data. It was a beat. It came in at 4 million seasonally adjusted annualized units. So that means that over the course of 12 months at this pace, 4 million existing homes will be sold.

That was higher than the 3.96 million expectation, but that’s an August number that was lower than July’s 4.01 million. So, we’re seeing a little bifurcation. New home sales, big recovery, existing home sales flat. The former report in new home sales is a government report. Folks have been talking a lot about government data and its quality.

That’s been a theme lately. And then, of course, the existing home sales report that’s from a private sector organization, that’s from the National Association of Realtors. So, telling a different story there. And then finally, this is not a huge not part of the quadruple beat.

The quadruple Beat is GDP durable goods. Unemployment claims and existing home sales. But the trade deficit also narrowed more than expected, so that was good news for, for the whole Onshoring theme and producing more things on shore rather than relying so much on imports.

Mary MacNamara

You mentioned capital expenditures, right?

Jose Torres

From an economic data perspective, you find the capital expenditures on the monthly basis.

You find in the durable goods report in the area where it says capital goods, excluding defense and excluding aircraft.

Mary MacNamara

You can’t correlate like the Capex for a company and the durable goods, capital expenditures.

Jose Torres

Theoretically they should add up to the same exact number. If we were able to isolate that the cap expenditures were all made in the US and all that stuff, so there is definitely a relationship. There is no doubt. In fact, it’s not a dumb question because you know how many people forecast a durable goods report, particularly the airplane. Section with what Boeing is saying, because Boeing is the only domestic airplane manufacturer. It’s an oligopoly. It’s, them and Airbus for the most part.

Mary MacNamara

About like a Gulf Stream or some of the other private like jet companies?

Jose Torres

These are manufacturers of jets or operators?

Mary MacNamara

Oh, Gulfstream.

Jose Torres

Yeah, so I’m not an airplane…

Mary MacNamara

My God I know something you don’t know! Okay, so Gulfstream, they produce jets, whole fleet of planes, the corporate jets or the family, private office movie star jets.

I wonder if they’re included in the durable goods too, or is it just like the big airlines?

Jose Torres

No, they would be included. because these are macroeconomic statistics, so everyone’s included really. But just the only thing would be like, are they actually, like manufacturing the jet itself, it sounds like they are. So then yes, they would be. They would be, yeah, they would count.

The market overall is weak, but we’re, look, as economists, what we do is we look for turning points, and we, oh, is this the bottom? Oh, mortgage rates are down. Home sales just shut up.

Are we about to get a real cyclical recovery in the real estate sector? Looking for follow through today from existing home sales. Didn’t get it. It’s okay. Home builders. The good news is that those firms, they became a lot more disciplined after the 2008 financial crisis. So, they don’t add supply until they’re, sure that they’re going to be able to move it.

And once they see some softness, they immediately pull back and they, they stop building, they stop their Capex and stuff. So that’s the good news. They’re good from a discipline,

Mary MacNamara

I’m glad everyone learned something from that whole experience!  Do they ever break out how it’s going for the Gen Z and millennials? Do they ever do a trend like that? Like how many boomers are selling? How are the Gen Zs and millennials changing the housing game? Do they, there, are there any stats about that? That would be interesting to see if that is moving for that generation.

Jose Torres

Yeah, they’re not they’re not as fast moving. There’s our, there’s always research studies on demographics. And, talking about the home ownership rate and how many renters are there versus how many people that own their homes outright or, with mortgages attached. There’re all kinds of research studies that do that.

Mary MacNamara

Where do you find those on the Bureau of Labor Statistics or other places?

Jose Torres

The Bureau of Labor Statistics, no. Probably the Census Bureau I know is going to have a lot. So, where you get the new home sales report, they have, they actually published a home ownership rate, which tells you is America becoming more owners or more renters?

A lower number mean that we’re more relying on renters and landlords to facilitate our housing, whereas a higher rate would indicate that we are more independent in our housing quest and in the resources that we have associated with our shelter. There’re mixed opinions. Some people Want that number to be higher like me.

And then there’s other people that you know that think that, renting is fine. And they don’t mind the lower home ownership rate.

Mary MacNamara

It’s interesting because the other night I was listening to a podcast and all of a sudden, an ad came on about, “Having trouble with realtors? Can’t sell your home? We’ll, buy it for cash. You don’t have to do anything, within two weeks.”

On and on, okay, is this the private equity people who are doing this? How does that affect everything? I know you’ve probably heard those ads too.

Jose Torres

Yeah, you got to be really careful because a lot of times in the beginning it sounds great, and then once you start talking about fees and costs and share of gains or whatever, a share of transactions, then all of a sudden, folks may not be as happy. Usually, you see a lot of those ads when there’s, lack of liquidity in the market and folks want to come in and, maybe take advantage a little bit and, play with terms that are super advantageous to them.

But maybe, not as advantageous to the folks that maybe need the liquidity. Maybe they’re late on their mortgage, maybe they need to sell a house fast in an environment where there’s not that many buyers. So, it’s important to be prudent to go nice and slow, to seek legal advice, to talk to people that you trust that have been around you for a long time, that have experience in the space, and they can better guide you as to, what the best decisions are.

Sometimes when you can’t pay your bills, renting your own house and, going to live with a family member while you get back on your feet that’s not a terrible thing either. A lot of times you can rent a house to someone else and that’ll pay most of your costs.

Or if it doesn’t pay all of it, maybe it’ll pay 80% or 75% and that’s enough for you to at least maybe take a little break. And maybe move to a lower cost area or maybe move in with family members or something like that. You don’t have to sell, if you can’t pay the bills at the

Mary MacNamara

Be careful with those ads.

Jose Torres One more thing on the housing. Work with your lenders. If you can pay, tell them, “Hey, look, give me 12 months off”. A lot of times they’ll do a workaround. They’ll just add, they’ll add your interest that year that you’re not paying, but they’ll just, make your loan if you have 25 left. They’ll just make 26 left. They’ll do a workaround or something like that. Talk to your lender. Work with them.

Mary MacNamara

Really good.

Jose Torres

What’s happening? Monday we’re going to talk about, we’re getting closer to the potential for a government shutdown. IBKR Forecast trader, our prediction market here. 60% odds on a government shutdown. Republicans and Democrats don’t want to work together. President Trump is upset. The Democrats want to pair back the cuts to Medicaid. They want some of the healthcare insurance subsidies. They want those to come back in some form as well. And that’s, sticking point for both parties.

So we’re going to wait and see.

If you pull up our Forecast Trader and you go press government fiscal policy, you’ll see it right at the top. I said 60% folks, but these are live, it’s up to 65% right now, so it’s 65%. So, two thirds odds. That we have a partial or full shutdown, by October 1st.

Mary MacNamara

Okay. Let’s see what happens. I’m sure it’ll be an interesting weekend.

Jose Torres

We have the tomorrow, September 26th, we have the Fed’s preferred inflation gauge, the PCE inflation report.

Personal consumptions expenditures, price index. Why don’t they use a consumer price index?

Well, a long time ago, they decided to go away from the CPI and to go to the PCE. My opinion is that they did that because they could maintain lower rates with the PCE versus the CPI. Because CPI is usually higher about 43 to 45% or so of the index is comprised by shelter and PCE cuts that in half.

So, if you’re having a cost-of-living crisis and housing costs are increasing significantly and you want to pick which inflation metric is going to reflect slower price pressures, you’d go with the PCE because it doesn’t count as much housing. That’s been a thing.

And then that’ll allow you to, as a central bank, to maintain lower interest rates. because the CPI is going to be harder to get inflation to your 2% target as a central bank, it’s all about the 2% target easier. The PCE is a lower bar to get there because housing isn’t as much of a contributor. So, we’ll be talking about what the market reaction is.

The markets have been in a little bit of a malaise lately. Interest rates have started to go up, not for a terrible reason. The numbers are terrific. The economic data is great, and that’s why rates are going up because people are seeing 3.8% growth. Wow, that’s buoyant. Who’s going to cut rates in that environment?

And then you have another, an argument to cut rates as well, further or faster was that the labor market was weakening, but today’s unemployment claims were very mild: 218,000. Looks like things aren’t that bad. Maybe we’re already recovering because we got that rate cut. because rate cuts, they motivate cyclical sectors.

So, let’s see if real estate can turn around. Let’s see if manufacturing can turn around. Little by little, but yeah, excited to talk to you all Monday. And you, of course, Mary.

Mary MacNamara

So, it’s always good to talk to you because I always feel so much better after I talk to you. It’s like there’s these silver linings in the clouds and I appreciate your time, and enjoy the weekend. We won’t worry too much about the government, and we’ll come back on Monday.

Jose Torres

Terrific. Great to see you all. Thanks.

Mary MacNamara

Thank you.