After a week of good news, last week’s economic data returned to the soft side. Inflation continues to run below Federal Reserve targets, and retail sales disappointed. Despite that, however, industrial production did well, suggesting that the economy as a whole may not be weakening, even if parts of it are. The Fed, in particular, appears to remain optimistic about growth.
Last week’s data
On Wednesday, Fed Chair Janet Yellen’s semiannual testimony to Congress was perceived as mildly dovish. She noted ongoing concerns that inflation was too low and indicated that future rate increases could be affected by that. She also failed to give a timetable for starting to reduce the Fed’s balance sheet, beyond sometime this year. Although markets interpreted them as dovish, Yellen's remarks were largely a reiteration of the most recent meeting minutes and, as such, provided little if any new information.
Fed concerns about inflation will continue, however. On Friday, Consumer Price Index data for June came in weak again, continuing a run of low inflation since March. As the string of weak inflation reports continues, the likelihood that it will affect Fed policy decisions increases. Headline inflation was flat for June, below an expected 0.1-percent increase. It also dropped to 1.6 percent on an annual basis, down from 1.9 percent in May. Core inflation edged up 0.1 percent, below expectations of a 0.2-percent gain, while the annual figure remained at 1.7 percent. With inflation continuing to come in below Fed targets, and the disinflationary trend widening, this is becoming increasingly hard to dismiss as temporary.
Also important on Friday was the retail sales report. Although consumer income continues to rise, spending has grown by much less. The headline retail sales number dropped 0.2 percent in June, below an expected 0.1-percent gain and down from an upwardly revised decline of 0.1 percent in May. For core retail sales—which exclude food, gas, building materials, and autos—the news was just as bad, with a drop of 0.1 percent against expectations of a 0.3-percent increase. The year-on-year comparisons were also down. The continued weakness in retail sales may be a sign of decreasing growth; as such, it is something to keep watching.
The industrial production report on Friday was the bright spot of the week, with growth of 0.4 percent, above expectations of 0.3 percent. Industrial production in the second quarter was up to 4.7 percent on an annual basis, from 1.4 percent in the first quarter. Manufacturing was up by 0.2 percent, as expected, and the capacity utilization rate rose to 76.6 percent, the highest level in almost two years. The strong headline growth number includes strong utility growth, on warm weather around the country, but the manufacturing number is also solid and suggests that this sector of the economy continues to strengthen.
A look at the week ahead
This week is a quiet one for economic news, with only housing data on tap.
On Tuesday, the National Association of Home Builders industry confidence survey will be released. It’s expected to increase from 67 to 68. This is a very high level of confidence, not far off the 12-year high of 71 set in March of this year. If it comes in as expected, the result would suggest that industry confidence continues to be supported by low levels of available inventory and high demand.
Housing starts, released on Wednesday, are expected to ratify that confidence, rising from 1.092 million in May to 1.18 million in June. This would represent only a partial rebound from the drop in May, but there is some downside risk, as building permit issuance has declined recently. Housing starts are actually down on a year-to-year basis, so a significant bounce back would be a positive indicator for the economy as a whole.
Have a great week!