Last week saw a number of important economic updates, with a focus on October’s inflation reports and a first look at consumer confidence in November. Prices continued to rise in October, which negatively affected consumer confidence to start November. This will be another busy week for updates, with October’s retail sales and industrial production reports and a few updates on the housing sector scheduled for release.
Last Week’s News
On Tuesday, the October Producer Price Index was released. Producer prices increased by 0.6 percent during the month, in line with economist estimates and slightly higher than the 0.5 percent increase in September. On a year-over-year basis, producer prices went up by 8.6 percent in October, also in line with estimates. Core producer prices, which strip out the impact of volatile food and energy prices, rose by 0.4 percent during the month and 6.8 percent year-over-year. Throughout most of the year, producer prices have faced upward pressure, as tangled global supply chains and rising material costs weighed on producers. Labor shortages have also been a driver of inflationary pressure, especially for skilled labor. Monthly price increases have slowed compared with their pace earlier in the year, but the large year-over-year rise reminds us that producers continue to contend with high inflationary pressure.
Wednesday saw the release of the October Consumer Price Index report. Consumer prices rose by more than expected, going up by 0.9 percent during the month, against calls for a 0.6 percent increase. On a year-over-year basis, consumer prices increased by 6.2 percent, above economist estimates for a 5.9 percent annual gain. Core consumer prices, which strip out the impact of volatile food and energy prices, increased by 0.6 percent and 4.6 percent on a monthly and year-over-year basis, respectively. Core producer prices increased by more than expected on both a monthly and annual basis. As with producer prices, consumer prices have seen upward pressure this year due to supply chain troubles and pent-up demand. The Fed’s recent decision to start tapering asset purchases was likely due at least in part to the increase in inflationary pressure throughout the year.
Friday saw the release of the preliminary estimate for the University of Michigan consumer sentiment survey for November. To start the month, the index fell to 66.8, down from 71.7 in October. The forecasts were for an increase to 72.5. This disappointing result brought the index to its lowest level in 10 years, as consumer views soured on both the present economic conditions and future expectations. The sharp drop in sentiment was due in large part to rising fear over inflation and the potential negative impact of rising prices on the economic recovery. Consumer one-year inflation expectations increased to 4.9 percent during the month, marking the highest one-year inflation expectation since 2008. Consumer buying conditions for household goods, which fell notably to start November, now sit at their second-lowest level since 1978. Historically, improving confidence has supported faster consumer spending growth, so this disappointing result may signal a slowdown in consumer spending growth in November.
What to Look Forward To
Tuesday will see the release of the October retail sales report. Sales are expected to increase by 1.1 percent, in a healthy step up from their 0.7 percent gain in September. The strong expectations are partly due to a rebound in auto and gas sales in October. Core retail sales, which strip out volatile auto and gas sales, are expected to show a more modest 0.5 percent increase, after rising by 0.7 percent in September. If estimates hold, this report would mark three consecutive months with retail sales growth. Given the importance of consumer spending to the economy, such a result would be encouraging. In September, we saw widespread increases in spending, with 11 out of the 13 categories reported showing growth. If the strong retail sales growth continues in October, it would be a good sign for the pace of overall economic growth heading into the end of the year.
Tuesday will also see the release of the October industrial production report. Industrial production is expected to increase by 0.9 percent, following a weather-driven 1.3 percent drop in September. Manufacturing production is also expected to rebound, with economists calling for a 0.9 percent gain in October, following the 0.7 percent drop in the previous month. Although the September downturn in industrial production and manufacturing output was partially due to Hurricane Ida, producers have also faced headwinds created by rising costs and material and labor shortages. Auto manufacturing has seen notable weakness lately. In September, it fell by 7.2 percent due in large part to the global semiconductor shortage. Looking forward, high demand should support industrial production and manufacturing output growth. Still, producers are facing very real impediments to notably faster growth.
Tuesday will also see the release of the National Association of Home Builders Housing Market Index for November. Home builder confidence is expected to remain unchanged at 80 for the month. This is a diffusion index, where values above 50 indicate growth, so the anticipated result would show the sector’s strength. Home builder confidence has remained strong since the expiration of initial lockdowns last year. During this period, consumer preferences for large single-family homes, along with low mortgage rates, have boosted the housing market. Historically, high levels of home builder confidence have supported new home construction, so a strong November reading for the index would bode well for the pace of construction during the month. The number of homes available for sale remains very low on a historical basis, so any acceleration in building new homes would be welcome.
Speaking of new home construction, Wednesday will see the release of the October building permits and housing starts reports. Both measures of new home construction are expected to show growth, after experiencing a slowdown in September. Permits are expected to increase by 3 percent, while housing starts are set for a 1.6 percent gain. Given the lack of houses for sale, the estimated results for these reports would mark an encouraging rebound in construction. Permits currently sit well above pre-pandemic levels, and housing starts remain very strong on a historical basis. Still, both these indicators can be volatile from month to month. The strength in new home construction during the year is impressive given the headwinds created by tangled supply chains and relatively high material costs. Overall, if the estimates hold, these reports would signal the continued health of the housing industry and bode well for the overall economic recovery.
That’s it for this week—thanks for reading!