Last week was relatively quiet on the economic update front. On an encouraging note, the preliminary consumer confidence report released for March showed a slightly smaller-than-expected drop in sentiment. This week will be busy, with many of the scheduled releases expected to show continued economic growth in February. Going forward, however, we expect to see headwinds due to the escalating nature of the coronavirus pandemic.
Last week’s news
On Wednesday, the Consumer Price Index for February was released. Consumer prices increased by a modest 0.1 percent during the month, against expectations for no change. For headline consumer inflation, a large uptick in food prices, likely due in part to a stockpiling of groceries at month-end, was more than enough to offset a fall in gas prices. Core inflation, which strips out the impact of volatile food and energy prices, showed a 0.2 percent increase, as expected. Year-over-year headline and core inflation rose to 2.3 percent and 2.4 percent, respectively. Falling service prices from industries related to travel are expected to keep inflation levels down in the short term.
On Thursday, February’s Producer Price Index report was released. Headline producer prices fell by 0.6 percent, against expectations for a 0.1 percent decline. This drop brought year-over-year producer inflation down to 1.3 percent, well below the 1.8 percent expected. Core inflation was also weak, with a 0.3 percent monthly decline that brought the year-over-year pace of core inflation down to 1.4 percent. This result was due to a large drop in the price of goods, primarily driven by slowing gas and jet fuel prices. Despite the Fed’s support over the past year, inflation has remained largely constrained, and we expect to see further weakness as the impact from the spread of the coronavirus continues to be a headwind for inflation growth.
The preliminary reading of the University of Michigan consumer confidence survey from March was released on Friday. Consumer confidence fell by less than expected, dropping from 101 in February to 95.9 in March, against expectations for a decline to 95. Concerns about the spreading coronavirus and the measures being taken to combat the disease weighed heavily on consumer minds at the end of February and beginning of March. Despite the better-than-expected result, it’s likely that we’ll see further declines in confidence given the escalating nature of the outbreak. Falling confidence is one of the major areas of concern caused by the current coronavirus pandemic, as improving consumer confidence typically supports faster consumer spending. The March reading marks the first decline for the index in seven months. Although we can likely expect further weakness, the index remains above the reading of 89.8 in August 2019.
The week ahead
The data releases over the past few weeks are primarily backwards looking. As such, they’ve largely struggled to reflect the constantly changing impact of the coronavirus pandemic. On Sunday, however, we were drawn back into the present when the Fed announced a surprise rate cut, amid a suite of measures designed to support the economy in these trying times. Rather than waiting for the release of the FOMC rate decision scheduled for this Wednesday, the Fed decided to cut the federal funds rate by a full point, from a range of 1 percent to 1.25 percent down to 0 percent to 0.25 percent. This cut was larger than the 50 bps cut economists had forecast, but it was largely in line with market expectations. The Fed also announced a return to quantitative easing, with a commitment to purchase at least $500 billion in Treasury securities and an additional $200 billion in mortgage-backed securities over the next few months. These actions were taken in order to help U.S. businesses and consumers weather the storm for the upcoming months. Nonetheless, the equity markets were not fully reassured by the move, and they opened up in negative territory today. While the tailwind from lower rates and additional liquidity should support the economy, continued market volatility remains likely until progress toward halting the spread of the coronavirus is made.
Tuesday will see the release of February’s retail sales figure. Sales are expected to show 0.2 percent growth during the month, which would be a solid result. Falling gas prices are expected to be a headwind for overall sales, as evidenced by the anticipated 0.4 percent increase for retail sales that exclude auto and gas. If the estimates hold, February would mark the fifth straight month with retail sales growth. Consumer spending was the primary driver of economic growth in 2019, so these continued positive results to start the year are encouraging. But with declining confidence and rising concerns about the spread of the coronavirus, future sales are expected to slow.
February’s industrial production report will also be released on Tuesday. Production is expected to show a strong 0.4 percent increase during the month, following a 0.3 percent decline in January. Production was negatively affected by the warm weather during January, which limited demand for utilities output. This trend has since reversed, which should support faster growth in February. Manufacturing output is set to increase by 0.3 percent, following a modest 0.1 percent decline in January. Manufacturer confidence levels were in expansionary territory to start the year, which typically leads to additional output growth. While the expected rebound in February would be a welcome sign, manufacturer confidence and output are expected to be negatively affected by the spread of the coronavirus. These indicators will bear watching going forward.
Tuesday will also see the release of the National Association of Home Builders Housing Market Index for March, which is set to remain unchanged at 74. This result would leave the index two points off the recent 20-year high of 76 attained in December 2019. Home builder confidence increased dramatically throughout 2019, rising from a three-year low of 58 set in December 2018. Declining mortgage rates and the associated increase in prospective home buyers gave builders more confidence, especially in regions with constrained supply. Home builders have responded by building more new homes, which in turn has helped stimulate the housing sector.
Speaking of new construction, on Wednesday, February’s building permits and housing starts reports will be released. Both are expected to decline, with permits set to fall by 3.2 percent and starts set to fall by 4.2 percent. These measures can be volatile on a month-to-month basis. The expected results would represent a modest decline, given the large gains seen in both starts and permits over the past year. Builders have been scrambling to meet additional buyer demand in regions with constrained supply, supported by high levels of confidence. If estimates are accurate, permits would still be at their second-highest monthly level since 2007. Starts would be at their third-highest level over the same period, so the anticipated declines are not as bad as they appear at first glance.
Finally, on Friday, February’s existing home sales report will be released, with sales expected to show solid 1.6 percent growth. This result would bring the pace of existing home sales to its highest monthly level since December 2017. Housing was one of the bright spots in the economy last year. Existing home sales are a prime example of why the sector was so impressive, as sales rebounded swiftly after hitting a three-year low in January 2019. Looking forward, as was the case with retail sales, we can reasonably expect to see future headwinds from the current health crisis, as prospective buyers stay out of the market over the short term.
That’s it for this week—thanks for reading!