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There were only a few major economic data releases last week, with a focus on international trade, consumer prices, and consumer confidence. Consumer inflation came in slightly above economist expectations in November, while confidence increased by more than expected to start December. This will be a much busier week of updates, with reports scheduled on producer inflation, retail sales, home builder confidence, new home construction, and industrial production. Economists will also be closely monitoring the results from the Fed’s December meeting.
Last Week’s News
Tuesday saw the release of the October international trade report. The report showed that the trade deficit declined notably during the month, falling from a revised $81.4 billion in September to $67.1 billion in October against calls for $66.8 billion. This marks the first time that the trade gap has declined in a month since July, which is an encouraging sign for the pace of the global economic recovery. The narrowing was supported by an 8.1 percent surge in exports during the month, which brought export volume to the highest monthly level on record. Part of the rise in exports was due to a rebound in industrial exports like crude oil, but we also saw a rise in travel exports for the second month in a row. Imports increased by 0.9 percent during the month, but this was not enough to offset the rise in exports in October. Overall, this was an encouraging report. It indicates that global trade is starting to normalize as we head into the end of the year, which may help support faster GDP growth in the fourth quarter.
On Friday, the Consumer Price Index report for November was released. The report showed consumer prices increased by slightly more than expected during the month, rising by 0.8 percent against calls for a 0.7 percent increase. On a year-over-year basis, consumer prices rose by 6.8 percent in November, which was up from the 6.2 percent year-over-year growth rate in October but in line with economist estimates. This marks the fastest pace in year-over-year headline consumer inflation since 1982 and signals that consumers are still facing continued high levels of price pressure. Core consumer prices, which strip out the impact of volatile food and energy prices, increased by 0.5 percent during the month and 4.9 percent on a year-over-year basis, which was expected. This report served as a reminder that inflationary pressure continues to weigh on the economy, which is one of the factors that drove the Fed to announce tighter monetary policy at its November meeting.
Friday also saw the release of the preliminary estimate for the University of Michigan consumer sentiment survey for December. Sentiment increased to start the month, as the index rose from 67.4 in November to 70.4 to start December against calls for a more modest improvement up to 68. The improvement for the headline index was driven by more optimistic consumer views on both current economic conditions as well as future expectations. While the improvement during the month was a positive development, November marked the lowest level for the index in a decade, so the modest increase still left the index at potentially concerning levels. Consumer confidence has soured over the past few months, as rising concerns about inflation have weighed on sentiment. With that being said, consumer spending growth has remained strong despite the declining confidence, so rising consumer concerns have not yet derailed the overall economic recovery, although this remains an important area to monitor in the months ahead.
What to Look Forward To
On Tuesday, the November Producer Price Index report is set for release. Producer prices are expected to increase by 0.5 percent during the month, which would be a modest decline from the 0.6 percent increase we saw in October. On a year-over-year basis, producer prices are expected to rise by 9.2 percent, up from the 8.6 percent year-over-year growth we saw in October. Core producer prices, which remove the impact of volatile food and energy prices, are expected to increase by 0.4 percent during the month and 6.8 percent on a year-over-year basis. These results would be in line with October’s core producer price growth. Both consumer and producer prices have seen notable upwards pressure throughout the course of this year, as improvements on the medical front allowed for a surge in spending, while supply chains remained constrained due to the uneven nature of the global economic recovery. Looking forward, falling energy prices in December should help mitigate some of the inflationary pressure during the month.
On Wednesday, the November retail sales report is scheduled for release. Economists expect to see retail sales increase by 0.8 percent during the month, which would represent a solid month of spending growth following a 1.7 percent increase in October. Core retail sales, which strip out the impact of volatile auto and gas sales, are also expected to increase by 0.8 percent during the month. If estimates hold, this would mark four consecutive months with retail sales growth, which is impressive given the rising prices and lowered levels of consumer confidence during that time period. High levels of savings since the start of the pandemic combined with pent-up consumer demand have continued to power spending growth throughout the fall despite the headwinds. Consumer spending growth accounts for the majority of economic activity in the country. So, any further increase in November would be a positive sign for the pace of the overall recovery during the month.
Wednesday will also see the release of the National Association of Home Builders Housing Market Index for December. This measure of home builder confidence is set to increase from 83 in November to 84 in December. This is a diffusion index, where values above 50 indicate expansion. So, any increase to the index would be a sign of faster growth for new home construction during the month. November’s result marked a six-month high for the index. If estimates hold, this would bring home builder sentiment to its highest level since February of this year. Home builder confidence has been well supported throughout the course of the year, as high levels of home buyer demand coupled with a lack of available homes for sale have given home builders confidence that newly constructed homes will be quickly purchased.
The third major release on Wednesday will be the FOMC rate decision from the Fed’s December meeting. The Fed cut interest rates to virtually zero at the start of the pandemic, and economists do not expect any changes to rates at this meeting. Instead, the focus will be on the Fed’s plans to taper secondary market asset purchases during the month. The Fed had previously been purchasing $120 billion per month in Treasury and mortgage-backed securities throughout much of the pandemic. But it announced a gradual tapering of purchases back at its November meeting. The original plan called for a $15 billion decline in purchases in November, with additional similar declines expected in the following months. Since then, comments from various Fed members have indicated that the central bank is considering increasing the pace of the tapering in an attempt to accelerate the normalization of monetary policy. Given the high levels of inflationary pressure throughout the economy and the improvements that we’ve seen this year for the labor market, economists are expecting a far more hawkish Fed in 2022, and the December meeting will likely set the tone for the year ahead.
On Thursday, the November housing starts and building permits reports are set to be released. These measures of new home construction are both expected to show growth during the month. Starts are expected to increase by 3.3 percent, while permits are set to rise by 0.4 percent. Both starts and permits can be volatile on a month-to-month basis, but home builder sentiment surged in November, which in turn is expected to support faster construction during the month. As previously noted, a lack of inventory of available homes for sale and high levels of home buyer demand have helped support new home construction throughout the course of the year, and further construction growth is expected in the months ahead. Home builder backlogs increased in October, while prospective home buyer foot traffic hit a six-month high during the month. So, we should continue to see strong levels of new home construction as we head into the end of the year.
We’ll finish the week with Thursday’s release of the November industrial production report. Industrial production is set to increase by 0.7 percent during the month, following a 1.6 percent increase in October. October’s strong result was a rebound following a weather-driven slump in production in September, so the anticipated slowdown in growth in November is understandable. Industrial production has now reached pre-pandemic levels, and further improvements in November would be a positive sign for the manufacturing industry. Manufacturing output is set to increase 0.6 percent during the month, down from the 1.2 percent growth in October. As was the case with overall industrial production, manufacturing production declined in September due to the impact from Hurricane Ida before rebounding in October.
That’s it for this week—thanks for reading!
