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Last week, the Fed left interest rates unchanged at its final meeting of the year. Muted inflation and falling unemployment support this wait-and-see approach from the central bank. This week will be filled with economic updates, including reports on the housing sector and industrial production. Regarding consumers, we’ll get a look at income, spending, and confidence numbers.
Last week’s news
On Wednesday, November’s Consumer Price Index was released. Consumer prices increased by 0.3 percent during the month, which was slightly higher than the 0.2 percent growth forecasted. This result was primarily due to rising gas prices, as the core index, which strips out the impact of volatile food and energy prices, went up by only 0.2 percent. Consumer inflation rose to 2.1 percent on a year-over-year basis, up from 1.8 percent in October. Despite the rising growth in November, we haven’t seen the anticipated upwards pressure on prices that September’s tariffs on consumer goods were expected to have.
The FOMC met on Tuesday and Wednesday for the final time this year. As expected, the FOMC rate decision released on Wednesday left interest rates unchanged. This meeting broke a streak of three consecutive meetings with a rate cut, as the Fed turned to easing monetary policy to support the economic expansion over the summer. With a strong jobs market and inflation under control, Fed members appear willing to take a wait-and-see approach to rates as we head into the new year. Market participants don’t anticipate any further rate cuts or hikes over the course of 2020. Yet, as we saw throughout 2019, Fed policy can adjust quickly in response to changing economic conditions.
On Thursday, November’s Producer Price Index was released. Producer inflation came in at 0 percent for the month, against expectations for a 0.2 percent increase. The flat month dragged year-over-year inflation down to 1.1 percent, well below the Fed’s stated 2 percent inflation target. The result was primarily caused by lowered prices for services, which, due to decreasing trade services margins, fell by more in a single month than they have since February 2017. November’s lackluster inflation reports support the Fed’s pause in rate hikes.
We finished the week with Friday’s release of November’s retail sales report. Retail sales grew by 0.2 percent, against expectations for 0.5 percent growth. Rising auto and gas sales boosted headline sales, as core retail sales that exclude auto, gas, and building material sales grew by only 0.1 percent for the month. This result is disappointing, as there was some hope for accelerated sales growth given improvements to consumer sentiment. Consumer spending has been the major driver of economic growth this year, so this slowdown indicates that overall economic growth is likely slowing as well. With that said, we have some reason for optimism going forward. An improving job market and continued support from the Fed indicate that spending is unlikely to fall further in the short term.
What to look forward to
We started the week with Monday’s release of the National Association of Home Builders Housing Market Index for December. Home builder confidence blew away expectations, with the index rising from 70 in November to 76 in December, against forecasts for a modest increase to 71. This is a 20-year high for the index, which is a very impressive turnaround considering home builder confidence hit a multiyear low of 56 in December of 2018. This year, home builder sentiment has steadily improved, as low mortgage rates and high consumer confidence levels have been driving more interest in newly built homes. Builders have been happy to meet this demand by investing in and building new housing stock. Looking forward, increased home builder confidence should support additional construction as we head into the new year.
Speaking of new construction, on Tuesday, November’s building permits and housing starts reports are set to be released. Economists are forecasting a decline in building permits but a 2.1 percent increase in housing starts. Such a result in housing starts would bring that indicator to its second-highest monthly level since 2007, as home builders have been willing and able to meet buyer demand for new home construction. New home supply remains constrained in certain markets, so an increase would be a positive development for the housing market.
Tuesday will also see the release of November’s industrial production report. Production is set to show 0.8 percent monthly growth, following a 0.8 percent decline in October that was largely due to the General Motors strike and an associated plunge in auto production. Manufacturing output is also expected to bounce back from the October slowdown, with 0.8 percent growth expected. As we finish out the year, a rebound following the slowdown in September and October would help calm concerns over a broader extended decline in industrial production. Despite November’s anticipated rebound, slowing global demand is likely to put a damper on industrial production to start off 2020.
On Thursday, we’ll get a direct look at home buyer demand, with the release of November’s existing home sales report. Sales of existing homes are expected to decline from 5.46 million in October to 5.45 million in November. But even so, a decline would still represent 9 percent growth on a year-over-year basis. This result would mark the fifth straight month of year-over-year improvements in existing home sales, indicating the slowdown we saw at the end of 2018 is well behind us. Housing growth has been a bright spot in the ongoing expansion. Continued strength here would bode well for overall economic growth for the quarter.
Friday will see the release of November’s personal income and personal spending reports. Economists expect personal income to increase by 0.3 percent during the month, while spending is set to increase by 0.4 percent. The forecast for growth is encouraging, given October’s report showing income remaining surprisingly flat for the month. Spending has been strong this year; if the estimates are accurate, November’s report will mark the ninth straight month of spending growth. As long as personal income and spending numbers continue to be healthy, overall economic growth should remain positive even if its pace has slowed a bit.
Finally, we’ll finish the week with Friday’s release of the second and final reading of the University of Michigan consumer confidence survey for December. The index is expected to remain unchanged from the month’s first estimate. The preliminary estimate of 99.2 was higher than the initial forecast of 97, as a better-than-expected November jobs report and equity markets near all-time highs continue to support consumer confidence. If the index remains unchanged, this would mark the fourth straight month of increasing consumer sentiment, following a surprising fall to a two-year low in August. Consumer confidence supports additional spending growth, so an improvement in December would be quite welcome.
That’s it for this week—thanks for reading!
