There were several important economic data releases last week with a focus on housing and the results from the most recent Fed meeting. The reports showed that housing construction slowed in May, reflecting lower demand for housing due to rising prices and mortgage rates. This will be a relatively quiet week of updates, with only one major report scheduled for release.
Last Week’s News
On Tuesday, the Producer Price Index report for May was released. Headline producer prices increased 0.8 percent, up from the downwardly revised 0.4 percent increase we saw in April but in line with economist expectations. On a year-over-year basis, producer prices increased 10.8 percent, down from the 10.9 percent increase in April and slightly below economist forecasts for a 10.9 percent increase. Core producer prices, which strip out the impact of volatile food and energy prices, increased 0.5 percent during the month and 8.3 percent on a year-over-year basis against calls for a 0.6 percent monthly increase and an 8.6 percent year-over-year rise in prices. While producer inflation was either in line with or below economist expectations, the report showed that producer prices are still facing large amounts of upward pressure. Producer inflation has been fueled over the past year by high levels of demand, global supply chain issues, and rising maturity and labor costs. Given the market and economist expectations for continued high inflation in the months ahead, the Fed is expected to focus on tighter policy throughout the rest of the year and into 2023.
On Wednesday, the May retail sales report was released. Retail sales came in below expectations, as headline sales declined 0.3 percent against calls for a 0.1 percent increase. Much of the miss for headline sales growth was due to weaker-than-expected auto sales in May. Core retail sales, which strip out the impact of auto and gas sales, increased 0.1 percent during the month. Even though core sales grew for the fifth month in a row, this report showed softening consumer demand for goods, likely reflecting the pressure created by high levels of consumer inflation. Looking forward, inflationary pressure and rising rates are expected to serve as headwinds for significantly faster levels of sales growth. Given that consumer spending drives the majority of economic activity in the U.S., this report indicated that the Fed’s attempts to slow the economy to combat inflation may be starting to filter into the economic data. Retail spending will be a closely monitored release in the months ahead to see if this is the start of a prolonged downtrend in consumer demand.
Wednesday also saw the release of the National Association of Home Builders Housing Market Index for June. This measure of home builder confidence declined during the month as the index fell from 69 in May to 67 in June, which was in line with economist expectations. This is a diffusion index where values above 50 indicate expansion, so this result signaled continued growth for the home building industry, just at a slower pace. Home builder confidence has been well supported over the past two years by high levels of prospective home buyer demand and a low supply of existing homes for sale. With that said, confidence has dropped every month this year, due primarily to rising mortgage rates and softening home buyer demand. Additionally, supply chain issues and rising labor costs have also served as headwinds for home builders this year. Looking forward, slower growth for the home construction industry is expected in the months ahead.
The third major release on Wednesday was the FOMC rate decision from the Fed’s June meeting. The central bank started hiking interest rates at its March meeting with a 25 bp hike to the federal fund rate, followed by a 50 bp hike at its June meeting. The Fed hiked the federal funds rate an additional 75 bps at this meeting, which was 25 bps higher than economist expectations but largely in line with market forecasts following the higher-than-expected consumer inflation figures in May. The rate hike was initially viewed favorably by markets, as investors appreciated the central bank’s willingness to notably increase rates to try and slow down the economy and combat inflation. Markets are pricing in the prospect of continued hikes at the four remaining Fed meetings this year, with the next meeting coming at the end of July. The Fed also reiterated plans to run off a portion of its balance sheet throughout the rest of the year and into 2023, which is another way the central bank plans on tightening monetary policy to combat inflation.
On Thursday, the May building permits and housing starts reports were released. Permits fell 7 percent during the month against calls for a 2.5 percent decline, while starts dropped 14.4 percent against forecasts for a more modest 1.8 percent decline. These two measures of new home construction can be volatile on a month-to-month basis, but the larger-than-expected decline in starts was notable as it brought new home construction down to its lowest level in more than a year. Rising prices and mortgage rates served as headwinds for new home demand, which, in turn, caused home builder confidence and construction activity to slow in May. That said, the amount of permits remains relatively strong on a historical basis, indicating that home builders are planning for more construction in the future.
We finished the week with Friday’s release of the May industrial production report. Production increased 0.2 percent during the month, down from the upwardly revised 1.4 percent increase we saw in April and below economist expectations for a 0.4 percent increase. The growth in overall production was supported by a solid increase in both utilities and mining production. That said, manufacturing output declined 0.1 percent in May, marking the first drop in manufacturing production since January. Capacity utilization increased modestly from a downwardly revised 78.9 percent in April to a new pandemic-era high of 79 percent. Ongoing supply chain challenges and high costs served as headwinds for manufacturing production, and these headwinds are expected to persist in the short term. Softening demand for manufactured goods also played a role in slowing manufacturing production.
What to Look Forward To
On Tuesday, the May existing home sales report was released. Sales of existing homes fell 3.4 percent during the month against calls for a 3.7 percent decline. This brought the pace of existing home sales to its lowest point since early 2020; however, it did leave the pace of sales near pre-pandemic levels. Housing sales surged in the second half of 2020 and remained strong throughout 2021 as shifting home buyer preferences and low mortgage rates spurred purchases. We saw sales spike again in January 2022, but the pace of existing home sales has declined every month since then due to a lack of homes for sale, rising mortgage rates, and high home prices. Looking forward, economists largely expect to see continued headwinds for the housing industry, as rising costs and rates are projected to stifle future sales growth. That said, slowing home sales may help to combat inflation given the large rise in prices we’ve seen over the past year and the importance of housing costs on overall inflation.
That’s it for this week—thanks for reading!