Last week’s news wasn’t particularly good, but neither was it particularly worrisome. Economic reports were mixed, with weak headline numbers supported by better details and trends.
Overall, growth remains slow and steady, despite the lingering slowdown from the end of last year.
A look at last week’s news
The retail sales report was generally in line with expectations.
- The headline number dropped by 0.1 percent, largely due to a further decline in gasoline prices, but was actually better than the expected decline of 0.2 percent.
- Retail sales excluding autos and gas, a better indicator, also came in above expectations, with a gain of 0.3 percent versus the expected 0.2 percent.
So far, so good. The problem was downward revisions to the previous month. Headline sales growth was revised down to a loss of 0.4 percent from an initial gain of 0.2 percent, while sales ex-autos and gas was revised down only slightly less, from a gain of 0.4 percent to a loss of 0.1 percent. Although the current month’s results are solid, the revisions clearly show that the weakness from the end of 2015 has persisted more than expected.
Price data was also mixed. Headline consumer prices continued to fall on a monthly basis, down 0.2 percent on lower energy costs, and the annual increase ticked down from 1.4 percent to 1 percent, but other trends reversed:
- Food was up by 0.2 percent on a monthly basis.
- The core inflation number, excluding food and energy, rose by 0.3 percent on the month, moving to a 2.3-percent increase for the year—the highest level in four years.
- On a three-month basis, inflation is now pushing 3 percent, the highest level since 2011.
Rising inflation is good in the sense that deflation is now much less of a risk, but it may also prompt the Federal Reserve to raise interest rates faster over the next year or so.
The National Association of Home Builders industry sentiment survey slightly underperformed expectations, staying at 58 against an expected increase to 59. This is still a healthy level and was bolstered by an increase in housing starts to 1.178 million, a gain of 5.2 percent after a 3.4-percent decrease the previous month.
Housing starts exceeded expectations, more than reversing the January decline, and the previous month was also revised up slightly, suggesting that housing remains healthy. The forward-looking data was softer, though, with building permits down 3.1 percent, worse than expectations, suggesting that growth will be modest in the near term.
Industrial production disappointed, with strong positive growth of 0.9 percent in the previous month dropping back to negative levels with a loss of 0.5 percent. Utility production was affected in both months by weather, resulting in the large swing. The drop in oil prices also continued to depress drilling and energy production activity.
This sector also had mixed reports, however, and the underlying details were better than the headline rather than worse. Looking at manufacturing alone, for example, activity increased by 0.2 percent, after a strong increase of 0.5 percent in January, suggesting that the sector continues to stabilize and may be moving into a sustainable expansion, with continued slow growth over the past six months. As the oil industry regains its footing and utilities output normalizes, this could be a positive indicator.
Finally, the University of Michigan Consumer Sentiment result also disappointed, dropping to 90.0 from 91.7, against expectations for a small increase, apparently due to a rise in gas prices toward the end of the month. Although this indicator remains at healthy levels, the continued decline suggests possible future weakness, particularly in consumer demand.
The week ahead
Sales of existing homes were reported this morning, falling by 7.1 percent from 5.47 million to 5.08 million, considerably worse than expectations of 5.31 million. Supply constraints and price increases are hitting both supply and demand, suggesting that housing sales may continue to grow more slowly, even as this should continue to support the homebuilding industry and housing starts.
New home sales will be reported on Wednesday and are expected to increase from 494,000 to 510,000, bolstered by the same supply constraints that are slowing existing home sales.
Durable goods orders will be reported on Thursday. The volatile headline number is expected to fall substantially, from a gain of 4.7 percent to a decline of 2.5 percent, on a drop in aircraft orders, but such a swing is typical for this data series. Core orders, which exclude transportation, are also expected to drop, from a strong gain of 1.7 percent to a decrease of 0.3 percent, which probably reflects a giveback of some of the unusual January gains rather than new weakness.
Have a great week!