Last week saw the release of a number of important economic updates, including February’s retail sales and industrial production reports and a look into home builder confidence and new home construction. Many of the reports came in below expectations, driven in large part by the severe winter storms that affected much of the country throughout February. This will be another busy week for updates, with highlights to come on housing sales, durable goods orders, and personal income and spending.
Last Week’s News
On Tuesday, the February retail sales report was released. Retail sales fell by 3 percent during the month, well below economist estimates for a more modest 0.5 percent decline. This decline offset some of the upwardly revised 7.6 percent increase in sales in January. January’s surge in spending was driven in large part by the stimulus checks that hit bank accounts during the month. The pullback in February is partially explained by the lack of recurring stimulus payments. Additionally, the winter storms that hit much of the country during the month served as a temporary headwind for consumer spending growth. The decline in sales was widespread. Core retail sales, which strip out the impact of volatile auto and gas sales, fell by 3.3 percent in February, following an 8.5 percent rise in January. Looking forward, the most recent round of stimulus checks and more normal weather are expected to serve as a tailwind for a return to sales growth in March.
Tuesday also saw the release of the February industrial production report. Industrial production fell by 2.2 percent during the month, below economist estimates for a 0.3 percent increase. Manufacturing output declined by 3.1 percent during the month, against economist estimates for a 0.2 percent increase. This report marks the first month with declining manufacturing output since April 2020, when lockdowns shut factories across the country. As was the case with February’s retail sales report, industrial production was seriously hampered by the winter storms during the month. Mining and chemicals output saw sharp weather-related declines. Despite the slowdown in February, industrial production and manufacturing output have recovered well since initial lockdowns were lifted last year. Looking forward, economists expect to see a rebound in production coincide with the more temperate weather in March.
Tuesday’s third major release was the release of the National Association of Home Builders Housing Market Index for March. This widely followed measure of home builder confidence fell from 84 in February to 82 in March, below economist estimates for no change. Still, this result leaves the index above the pre-pandemic high of 76 recorded in December 2019, highlighting the impressive increase in home builder confidence we’ve seen over the past year. Home builder confidence has been buoyed by record low mortgage rates and shifting home buyer preference that have drawn additional prospective home buyers into the market. The report showed that prospective home buyer foot traffic remains strong, although home builders cited rising lumber costs as a challenge during the month. Looking forward, rising construction costs and mortgage rates may serve as a headwind for significantly higher levels of home builder confidence. Nonetheless, if confidence remains near current levels, it should support a strong pace of new home construction.
On Wednesday, the February building permits and housing starts reports were released. Starts fell by 10.3 percent during the month, against calls for a 1.3 percent decline, while permits fell by 10.8 percent compared with forecasts for a 7.2 percent decline. These measures of new home construction can be quite volatile on a month-to-month basis, but they have rebounded notably since initial lockdowns were lifted last year. Permits, which are a proxy for future construction, hit a 14-year high in January 2021 and are up 17 percent on a year-over-year basis. This result indicates that strong levels of new home construction should continue. Starts were negatively impacted by the winter storms in February, but they should rebound in upcoming months given high levels of home builder confidence and moderating weather. Home builders have a large backlog of homes to build, which should support a rebound for starts as we head into the spring.
Wednesday also saw the release of the FOMC rate decision from the Fed’s March meeting. This meeting marked one year since the Fed cut the federal funds rate to virtually zero at the start of the initial lockdowns. As expected, no rate changes were made at this meeting. The Fed continued to signal that accommodative monetary policy will be in place for the foreseeable future. On average, the FOMC board members are not calling for an increase in rates until 2023 at the earliest. Fed Chairman Jerome Powell reiterated this supportive stance at his post-meeting press conference. He stated that the Fed is not currently overly concerned with rising long-term interest rates and inflation expectations. The Fed is expected to continue its current asset purchase program and to keep rates low until substantial progress is made in getting people back to work. Ultimately, there were no major surprises at this meeting. The continued supportive policy should continue to help drive the ongoing economic recovery, especially as we see further progress on the public health and vaccination fronts.
We finished the week with Thursday’s release of the initial jobless claims report for the week ending March 13. The number of initial weekly unemployment claims rose unexpectedly from 725,000 to 770,000, against forecasts for a decline to 700,000. The weekly measure of initial claims has been volatile on a week-to-week basis, but the four-week moving average for initial claims fell to 746,000 during the week. This improvement brought average initial claims to their lowest level since the end of November 2020. This result is likely due in large part to the improved public health situation over the past few weeks and the associated easing of state and local restrictions that were put in place to combat the third wave of infections. Looking forward, we may be positioned for an acceleration in labor market recovery given the improving public health picture and the tailwind from the recently passed stimulus bill. With that said, initial claims remain high on a historical level, indicating continued stress on the job market.
What to Look Forward To
On Monday, the February existing home sales report was released. The pace of existing home sales fell by more than expected, declining by 6.6 percent during the month against forecasts for a more modest 3 percent drop. This result is likely due in large part to the inclement weather in February. Still, despite the drop in sales reported, existing home sales are up by 9.1 percent on a year-over-year basis. This result highlights the segment’s rebound since initial lockdowns were lifted last year. Over the past year, the rising pace of existing home sales has been largely driven by record low mortgage rates and shifting home buyer preference due to the pandemic. Looking forward, however, low supply and rising mortgage rates and prices may serve as a headwind for the continuation of significant growth. With that said, sales near the current levels do represent a notable increase compared with pre-pandemic levels and signal a healthy housing market.
Tuesday will see the release of the February new home sales report. The pace of new home sales is expected to fall by 4.6 percent during the month, following a 4.3 percent increase in January. This segment is a smaller and often more volatile portion of the housing market compared with existing home sales. Still, if the estimate holds, new home sales would be up 23 percent year-over-year, highlighting continued high levels of home buyer demand. Economists expect that the winter weather will have hindered growth for new home sales, but low supply and rising prices also likely served as headwinds. Looking forward, supply constraints and rising prices may restrain significantly faster levels of growth in new home sales. Nonetheless, as the anticipated year-over-year figures demonstrate, sales near current levels would represent a strong housing market compared with pre-pandemic levels.
On Wednesday, the preliminary estimate of February’s durable goods orders report is set to be released. Orders are expected to rise by 0.9 percent during the month, following a 3.4 percent increase in January. Core durable goods orders, which strip out the impact of volatile transportation orders, are expected to increase by 0.6 percent. If estimates hold, this report would mark 10 straight months with increased core durable goods orders. As these orders are often viewed as a proxy for business investment, they signal steady business spending. Business confidence and spending have remained impressively resilient since initial lockdowns were lifted last year. Durable goods orders growth in February would demonstrate continued business investment despite the inclement weather throughout much of the country.
Thursday will see the release of the initial jobless claims report for the week ending March 20. Economists expect to see initial unemployment claims fall from 770,000 to 735,000 for the week. This result would lower the four-week moving average for initial claims, but would leave claims relatively range bound. Compared with December and January results, we have seen notable improvement in this report, but the number of weekly claims remains high on a historical basis. This signals continuing labor market stress, but the recent stimulus bill may serve as a tailwind. In addition, continued progress on implementing vaccinations should lead to an accelerated recovery for the labor market over the next few months. But until we see further progress in the weekly and monthly employment data, this report will continue to be widely monitored.
On Friday, the February personal income and personal spending reports are set to be released. Spending is expected to fall by 0.8 percent, following a 2.4 percent increase in February. Economists expect this result to be similar to the pattern in retail sales, which saw a stimulus-induced surge in January partially reversed in February. Incomes have been very volatile on a month-to-month basis since the start of the pandemic, driven by shifts in federal stimulus and unemployment payments. Incomes are expected to fall by 7 percent in February, which is understandable given the 10 percent increase recorded in January. Looking forward, the recent $1.9 trillion stimulus bill is expected to serve as a tailwind for a return to growth for both personal income and spending in March. The stimulus checks have already started to hit bank accounts. So, while the anticipated declines in February’s personal spending and income figures may be disappointing, the potential for a swift recovery in March is a good sign that the weakness may be transitory.
We’ll finish the week with Friday’s second and final release of the University of Michigan consumer sentiment survey for March. The initial estimate saw this widely followed measure of consumer confidence increase by more than expected. It rose from 76.8 in February to 83 in March, against calls for a more modest increase to 78.5. Economists expect the index to record a further rise to 83.5 at month-end. If the estimate holds, it would represent a new post-pandemic high for the index, demonstrating improving consumer confidence as we head into the spring. The improvement on the public health front and recent passage of another federal stimulus bill are expected to support higher levels of intramonth confidence. Historically, higher levels of consumer confidence have translated into faster levels of consumer spending growth. Accordingly, any improvement for the index throughout the month would be another positive signal for March’s spending figures.
That’s it for this week—thanks for reading and stay safe!