The likelihood of a recession is beginning to crystalize in the eyes of economists as markets prepare for the Federal Open Market Committee's upcoming July meeting. It is expected that the Federal Reserve will implement another 75 basis point increase to the federal funds rate (moving it to 2.25%-2.5%) to try and cool down inflation that is at a 40-year peak. Previously, economists were pricing in a more hawkish 100 basis point rate hike but Fed members have since put forth a more dovish tone when discussing monetary policy strategy. 

Meanwhile, red flags keep popping up in economic data. The yield curve between the 10- and 2-year Treasury notes has remained inverted for most of this month. All recessions have been preceded by yield curve inversions however not all yield curve inversions have resulted in recessions. Fed chair Jerome Powell recognizes that stricter monetary policy from the central bank would likely push the economy into a recession but has reiterated the Fed's goal of curbing inflation as its number one task.

Powell has also remarked that he understands employment will likely suffer as they implement this policy. The June Jobs Report from the Department of Labor exceeded expectations but that data was gathered before June's 75 basis point rate hike. More recent employment data from the Labor Department showed a distinct uptick in jobless claims. Initial jobless claims for the week ending July 16 were up 7,000 week-over-week and 11,000 above the estimate from Dow Jones. The 251,000 jobless claims were the highest weekly total since November 13, 2021. 

Furthermore, the Philadelphia Fed manufacturing index showed a widening difference between the companies reporting expansion and those reporting contraction. The Philadelphia Fed's index fell to a reading of -12.3 which was 9 points worse month-over-month. This means more companies are reporting contractions.

The contraction is being felt in a big way by the housing industry. The Mortgage Bankers Association's weekly mortgage application survey showed that demand fell more than 6% for the week ending July 16. Purchase activity was down 7% for the week and down nearly 20% year-over-year.

A report earlier this month from Redfin noted that, while many potential homebuyers aren't applying, there is also a growing number who are pulling out of their previous agreements. The report states that about 15% of home purchase contracts nationwide were canceled in June—the highest percentage since the beginning of the pandemic. But it's not necessarily a bad thing. 

Redfin's Deputy Chief Economist Taylor Marr is quoted in the release saying, "The slowdown in housing-market competition is giving homebuyers room to negotiate, which is one reason more of them are backing out of deals. Buyers are increasingly keeping rather than waiving inspection and appraisal contingencies. That gives them the flexibility to call the deal off if issues arise during the homebuying process."

Another lagging data point came from the National Association of Realtors which reports that June's existing home sales fell 5.4% month-over-month which is the slowest sales pace since the start of the pandemic. The median price of an existing home rose once more in June, hitting a new record of $416,000. When you look at interest rates that inched up again week-over-week, hitting 5.54% according to Freddie Mac, many buyers are simply being priced out.

In addition, homebuilder sentiment dropped 12 points in June down to 55, according to the latest survey from the National Association of Home Builders. Anything above 50 is considered positive; however, with the exception of April 2020, this is the largest single-month drop in the survey's 37-year history. 

There is a silver lining to be found in the NAHB survey, however. The survey shows that 13% of homebuilders reported reducing home prices in order to stave off cancellations and support sales.