Monday Update: Inflation and Retail Sales Slow, Confidence Jumps

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Sep 17, 2018 2:23:30 PM

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Monday updateLast week’s data started with prices and whether inflation was picking up. This week’s economic data is all about housing.

Last week’s news

On Wednesday, the producer prices reports surprised to the downside. The headline index, which includes energy and food, dropped by 0.1 percent for August; this result was against an expected increase of 0.2 percent and up from a flat result in July. The decline, however, came from the volatile areas of trade and wholesale pricing. The annual change also dropped on base effects. It went from 3.2 percent in July to 2.8 percent in August. Despite the drop, longer-term inflation pressures remain elevated above the Fed’s target range. The core index, which excludes energy and food, also dropped. It went from 0.2 percent in July to 0.1 percent for August, while the annual figure went from 2.7 percent to 2.4 percent. Although these figures are down in aggregate, the underlying trend in less volatile components remains stronger, suggesting inflation will continue to rise after this month’s weak report.

On Thursday, the consumer price reports also showed weaker inflation trends. The headline index, which includes food and energy, rose by 0.2 percent for August; this result was the same as July and somewhat below expectations of a 0.3-percent increase. The annual figure dropped from 2.9 percent in July to 2.7 percent in August. Core index growth also ticked down. Here, the monthly figures went from 0.2 percent in July to 0.1 percent in August, while the annual figure dropped from 2.4 percent to 2.2 percent. As with the producer prices, despite the monthly declines, these figures indicate inflation continues to run above the Fed’s target levels, which should continue to drive interest rate increases.

The retail sales report, released on Friday, also weakened. It showed growth of 0.1 percent for August, well below expectations of 0.6-percent growth. July’s figure was revised up from 0.5 percent to 0.7 percent, however, which made up for some of the shortfall. While worth watching, this modest pullback is not unusual given the big increase in July. Core retail sales, which exclude autos, also pulled back somewhat. August growth was 0.3 percent, below expectations of 0.5 percent. Here again, July’s figure was revised up from 0.6 percent to 0.9 percent, which actually more than made up for the shortfall. While this is a weak month, given the strong July numbers, the weakness is likely to be only normal variation.

Also on Friday, the industrial production report beat expectations. It rose by 0.4 percent for August, above expectations of 0.3 percent. July was also revised upward to 0.4 percent from 0.1 percent, on strong utilities production and drilling and mining growth. Manufacturing, on the other hand, came in below expectations. It dropped from a 0.3-percent gain in July to a 0.2-percent gain in August. This decline may be due to the rise in the U.S. dollar’s value and possibly tariffs, and so it will need to be watched going forward.

Finally, the University of Michigan consumer confidence survey, also released on Friday, surprised significantly to the upside. It rose from 96.2 in August to 100.8 for September. This is a very high level historically. It also suggests that consumers are not yet worried about the effects of a trade war, given a strong labor market and the recent stock market surge to close to a new high. This pop is also consistent with the recent increase in the Conference Board survey to close to an 18-year high.

What to look forward to

On Tuesday, the National Association of Home Builders survey will be released. It is expected to tick down a bit further—from 67 in August to 66 in September—for the third month in a row. There may be some upside risk here. Although the industry continues to suffer from labor shortages and slowing housing demand, dropping lumber prices and an increase in permits may signal improved sentiment. That being said, this survey has shown declining confidence for several months now.

On a similar note, the housing starts report, released on Wednesday, is expected to show further recovery after a significant drop in June. It should rise from 1.17 million in July to 1.23 million (annualized) in August. Here again, this report will be constrained by rising supply and weakening demand. Even if it comes in as expected, it will still be below the levels from earlier this year.

Finally, on Thursday, the existing home sales report is also expected to show sales rising from 5.34 million in July to 5.38 million in August. This would be a partial recovery, but as with new home sales, it will be below the levels of the first half of the year.

Overall, while some recovery is expected from the weak results of last month, the data will likely show that housing continues to slow.

Thanks for reading and have a great week!

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