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Last week saw the release of several important economic updates, with a focus on the housing sector. September’s existing home sales report was a highlight, with sales growth hitting a one-year high during the month. This will be another busy week for updates. The reports scheduled will touch on wide swaths of the economy, including a first look at third-quarter GDP growth.
Last Week’s News
On Monday, the September industrial production report was released. During the month, production declined by 1.3 percent, in a result well below economist estimates for a 0.1 percent increase. The surprisingly weak result was caused by a weather-driven slowdown in utilities and mining production, as well as a drop in manufacturing output. Manufacturing output declined by 0.7 percent in September, against calls for a 0.1 percent increase. In addition, August’s industrial production and manufacturing output reports were revised downward from modest gains to declines of 0.1 percent and 0.4 percent, respectively. These disappointing results highlight the very real challenges that manufacturers are currently facing. Tangled supply chains, labor shortages, and rising costs have all served as headwinds for faster output growth over the past few months. Motor vehicle manufacturing has been a major drag on overall manufacturing growth, as the global semiconductor chip shortage and a shutdown of large parts of the auto industry led to a sharp drop in motor vehicle production in September. High levels of demand are expected to support additional manufacturing growth in the medium to long term. Still, this report indicates that manufacturers were not immune to the recent economic slowdown. In the months ahead, we may see more turbulence.
Monday also saw the release of the National Association of Home Builders Housing Market Index for October. Home builder confidence improved by more than expected during the month, with the index rising from 76 in September to 80 in October. The forecasts were for a modest decline to 75. This result brought home builder confidence to its highest level in three months, signaling faster expansion for new home building activity. The improvement was widespread, as each of the four geographic regions saw improvements. The strong result was also supported by an increase in prospective home buyer foot traffic in September. The housing sector has been one of the bright spots in the post-lockdown economic recovery, as shifting home buyer preference for more space and low mortgage rates have continued to support high levels of home construction and sales. Although home builders have had to contend with tangled supply chains and rising costs throughout the year, high demand and low inventory of existing homes for sale have supported a surge in new home construction since initial lockdowns expired last year.
Speaking of new home construction, on Tuesday, the September builder permits and housing starts reports were released. Starts declined by 1.6 percent against calls to remain unchanged, while permits dropped 7.7 percent against forecasts for a 2.4 percent decline. Still, both permits and starts remain well above the pandemic-era lows, signaling healthy levels of new home construction. The month’s slowdown in new home construction was driven by a drop in multifamily construction. The pace of single-family starts remained unchanged in September. Last year, new home construction rebounded swiftly following the expiration of initial lockdowns, driven in large part by a surge in single-family construction. Looking forward, large home builder backlogs, continued high levels of home buyer demand, and a lack of existing homes for sales are expected to support further new home construction.
On Thursday, the September existing home sales report was released. The pace of existing home sales surged by 7 percent, rising notably above economist estimates for a 3.7 percent gain following the 2 percent decline in August. Marking the largest monthly increase for existing home sales in more than a year, this report brought the pace of this indicator to its highest level since January. Late last year, existing home sales increased notably. Throughout most of 2021, however, sales growth declined due to a lack of homes for sale and rising prices. But we’ve started to see the pace of year-over-year price growth moderate in the past few months, which has supported sales growth. That said, the supply of existing homes for sale remains very low on a historical basis, which could constrain sales growth in the months ahead.
What to Look Forward To
On Tuesday, the Conference Board Consumer Confidence Index for October will be released. Economists expect to see confidence decline modestly, from 109.3 in September to 108 in October. If estimates hold, this report would bring the index to its lowest level since February, signaling rising consumer concern about the economic recovery. The previously released University of Michigan consumer sentiment survey showed a drop in sentiment during the month, driven by rising fears of inflation and a souring view on the economy. Historically, improving consumer confidence has supported consumer spending growth, so the recent weakness in the two major confidence reports is concerning. That said, consumer spending growth remained solid in September, even for big-ticket items such as houses, so the recent declines in confidence have not been enough to derail the recovery. Given the importance of consumer spending to the economy, this monthly report will continue to be widely monitored.
Wednesday will see the release of the preliminary estimate of the September durable goods orders report. Durable goods orders are set to decline by 1 percent, following a 1.8 percent increase in August. This anticipated drop in headline orders is primarily due to a slowdown in volatile aircraft orders. Core durable goods orders, which strip out the impact of transportation orders, are set to increase by 0.4 percent, following a 0.3 percent gain in August. If estimates hold, this report would mark five straight months with core durable goods orders growth. Core durable goods orders are often viewed as a proxy for business investment, so growth would be a positive sign that businesses have continued to spend. Throughout the year, improving public health statistics and high consumer demand for goods and services have supported business spending.
On Thursday, the advance estimate of third-quarter GDP growth will be released. The report is expected to show that the economy grew at an annualized rate of 2.4 percent during the quarter, down from the 6.7 percent annualized growth in the second quarter. The anticipated slowdown is due in large part to an expected drop in personal consumption growth. That indicator is slated to fall from a 12 percent annualized growth rate in the second quarter to a 1.2 percent growth rate in the third quarter. The Delta variant and rising inflationary pressure caused a slowdown in real consumer spending growth during the quarter, following a surge in spending in the second quarter as public health restrictions were lifted. Still, despite the anticipated slowdown, the economy is expected to grow by a strong 5.7 percent during the year due to the spending surge in the first two quarters.
We’ll finish the week with Friday’s release of the September personal income and personal spending reports. Personal income is expected to decline by 0.1 percent, while personal spending is expected to increase by 0.5 percent. Throughout the course of the pandemic, incomes have been volatile. The anticipated drop is primarily due to the expiration of enhanced unemployment benefits in September. Looking forward, labor shortages should support continued wage growth, helping personal incomes to remain at a healthy level despite the expiring federal stimulus payments. Throughout the year, personal spending growth has been boosted by improving public health and pent-up consumer demand. If spending growth comes in as expected, this report would echo a similar improvement in retail sales during the month, signaling that consumers remain willing and able to spend despite lower confidence.
That’s it for this week—thanks for reading!
