Last week saw a number of important economic data releases, with a focus on February’s inflation reports and a first look at consumer confidence in March. Consumer confidence increased by more than expected to start the month, bringing the University of Michigan consumer sentiment index to a one-year high. This week will be packed with updates once again. Highlights will include February’s retail sales and industrial production news and reports on home builder confidence and new home construction.
Last Week’s News
On Wednesday, the February Consumer Price Index was released. Consumer prices increased by 0.4 percent during the month, in line with economist estimates and slightly higher than the 0.3 percent increase we saw in January. On a year-over-year basis, consumer inflation rose from 1.4 percent in January to 1.7 percent in February. Part of the month’s overall increase in consumer prices was due to rising gas prices. Core consumer prices, which strip out the impact of volatile food and energy prices, rose by a more modest 0.1 percent during the month and 1.3 percent year-over-year. These results were below economist estimates for 0.2 percent monthly and 1.4 percent year-over-year core consumer price growth. Throughout the pandemic, consumer inflation has largely remained constrained. So, even with the rise in prices in January and February, year-over-year consumer inflation remains well below the pre-pandemic high of 2.5 percent recorded in January 2020.
On Thursday, the initial jobless claims report for the week ending March 6 was released. The report showed that the number of initial unemployment claims fell by more than expected, dropping from 754,000 to 712,000. Calls had been for a more modest decline to 725,000 initial claims. This improvement brought the pace of weekly layoffs to its lowest level since early November 2020—a positive sign that the medical progress is translating into better economic conditions. The number of initial claims has been volatile on a weekly basis. Nonetheless, we’ve seen continued improvement throughout much of the new year, as the four-week rolling average for initial claims is now at its lowest level since the start of December 2020. Overall, this encouraging report signals declining levels of stress on the labor market. While a lot of work must be done to get back to pre-pandemic employment levels, recent employment data points toward an accelerating recovery for the job market. This is a positive signal for the pace of the overall economic recovery.
Friday saw the release of the February Producer Price Index. Producer prices increased by 0.5 percent during the month and 2.8 percent on a year-over-year basis. This result was largely in line with economist estimates calling for 0.5 percent growth during the month and 2.7 percent year-over-year growth. As was the case with consumer inflation, rising gas prices had an impact in the increased producer prices. Core producer inflation, which strips out volatile food and energy prices, showed a more muted 0.2 percent monthly increase and a 2.5 percent year-over-year rise. The increase in prices in February brought the rate of producer inflation to its fastest level since late 2018, driven in large part by increased raw material and transportation costs for producers. Looking forward, continued inflationary pressure is expected given the accelerating economic recovery. But the Fed has indicated that it is comfortable letting inflation run above its 2 percent target until further significant progress is made getting people back to work.
We finished the week with Friday’s release of the preliminary estimate of the University of Michigan consumer sentiment survey for March. This widely followed gauge of consumer confidence came in above expectations, rising from 76.8 in February to 83 in March. Forecasts were for a more modest improvement to 78.5. This result brought the index to its highest level in a year, passing the previous post-lockdown high of 81.8 we saw in October 2020. Both the present situation and future expectations sections of the report saw improvement during the month, which drove the overall strong result. This improved outlook likely reflects recent progress in combatting the pandemic and the anticipated tailwind from the recently passed federal stimulus bill. Historically, higher levels of consumer confidence have translated into faster consumer spending growth. Accordingly, this better-than-expected result is a good sign for faster consumer spending in the upcoming months. In turn, that could signal an accelerating economic recovery as we head into the spring and summer.
What to Look Forward To
On Tuesday, the February retail sales report is set to be released. Retail sales are expected to decline by 0.3 percent during the month. The anticipated result would follow a 5.3 percent increase in January, which was driven in large part by the December stimulus checks hitting bank accounts. With that impact fading, a drop in sales in February is understandable. The winter storms throughout much of the country during the month are also expected to serve as a headwind for faster sales growth. Core retail sales, which strip out volatile auto and gas sales, should show a similar 0.4 percent decline in February following a strong 6.1 percent increase in January. Looking forward, a return to faster retail sales growth is expected in the next month or two. The impetus for growth should come from recent improvements in consumer confidence and the anticipated tailwind from the recently passed federal stimulus bill that will send another round of checks to American bank accounts.
Tuesday will also see the release of the February industrial production report. Industrial production is expected to increase by 0.4 percent during the month, following a 0.9 percent increase in January. This anticipated slowdown is partially due to a drop in oil refining in February, caused by the negative impact of winter storms in key production states. Industrial production has rebounded well since initial lockdowns were lifted last year, powered in part by improving manufacturing production. Manufacturing output is expected to show solid 0.5 percent growth during the month, following a 1 percent increase in January. If estimates prove accurate, they would mark 5 straight months with increased industrial production and 10 straight months with rising manufacturing output. Ultimately, this report is expected to show continued resilience for the manufacturing industry despite the weather-related headwinds in February.
Tuesday’s third major release will be the release of the National Association of Home Builders Housing Market Index for March. This widely followed measure of home builder confidence is expected to remain unchanged at 84, leaving it close to the record high of 90 recorded in November 2020. This is a diffusion index, where values above 50 indicate expansion, so the anticipated result would signal continued strong growth for the housing sector. Home builder confidence has been buoyed over the past year by record low mortgage rates and shifting home buyer preferences that have led to a surge in prospective home buyers. The supply of homes available for sale is near record lows, which also supports higher levels of home builder confidence. Overall, if estimates prove accurate, this release would be a sign that home builders continue to see a healthy housing sector.
On Wednesday, the February building permits and housing starts reports are set to be released. Permits and starts are expected to fall by 7.2 percent and 0.6 percent, respectively, during the month. These gauges of new home construction can be quite volatile on a month-to-month basis, although both have rebounded notably since initial lockdowns were lifted. Building permits hit their highest level since 2006 in January, and starts also remain well above pre-pandemic levels. Once again, the weather likely served as a headwind for faster growth in some regions of the country, which could contribute to the anticipated declines for new home building activity. Looking forward, rising labor and material costs may prevent significantly faster levels of new home construction. If the pace of construction remains near current levels, however, it would continue to signal a strong housing sector.
Wednesday will also see the release of the FOMC rate decision from the Fed’s March meeting. This meeting will mark one year since the Fed cut the federal funds rate to virtually zero at the start of the lockdowns. Economists do not expect any rate changes at this meeting. Instead, the Fed is expected to continue its easy monetary policy in support of the ongoing economic recovery. The passage of the recent $1.9 trillion stimulus bill will likely be reflected in higher growth and inflation expectations from the central bank. But, with the labor market recovery lagging, the Fed is not expected to raise rates for the foreseeable future. Fed Chairman Jerome Powell should continue to provide supportive statements at his post-meeting press conference, which will likely also include discussion about the recent increase in long-term rates. Currently, the Fed has no plans to address rising long-term rates, so any information on how it views this development will be interesting. It’s an open question whether the Fed will signal any plans for a policy change to rein in longer-term rates.
We’ll finish the week with Thursday’s release of the initial jobless claims report for the week ending March 13. Economists expect to see a modest decline in the number of initial weekly unemployment claims during the week. Economists are calling for a drop from 712,000 initial claims to 703,000. If estimates prove accurate, they would represent the lowest number of weekly initial claims reported since initial lockdowns were lifted, beating the 711,000 claims made in the week ending November 6, 2020. As previously mentioned, initial claims have been volatile on a week-to-week basis. Notably, however, we have seen a decline in initial claims over the past month as state and local restrictions have been eased. If similar levels of improvements continue over the next few weeks, they would signal an accelerating job market recovery. They would also be a welcome indication that improvements on the public health front are spurring the overall economic recovery.
That’s it for this week—thanks for reading and stay safe!