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Last week was relatively quiet on the economic update front, with a focus on October’s inflation reports, the weekly initial claims report, and the first look at consumer confidence in November. This week will be busier, with releases on retail sales, industrial production, and housing.
Last Week’s News
On Thursday, October’s Consumer Price Index was released. This measure of consumer inflation came in below expectations for the month, with prices remaining unchanged against calls for a 0.1 percent increase. Core consumer prices, which strip out the impact of volatile food and energy prices, also remained unchanged, against forecasts for 0.2 percent growth. On a year-over-year basis, headline prices rose by 1.2 percent and core prices increased by 1.6 percent. These results were down 1.3 percent and 1.7 percent, respectively, from the annual growth rates seen in September. Inflation has remained largely constrained this year, due to the deflationary pressure created by the pandemic. This report showed a moderation in the upwards price pressure for consumer goods we’ve experienced since lockdowns ended.
Thursday also saw the release of the weekly initial jobless claims report for the week ending November 7. There were 709,000 initial unemployment claims filed during the week. This result, which was better than the 731,000 initial claims expected, marks the best week for initial claims since March. In addition, the drop in initial claims from the last week of October to the first week of November was the largest weekly decline we’ve seen in five weeks. Continuing unemployment claims, which are reported with a one-week lag to existing claims, also showed better-than-anticipated improvement. They fell from 7.222 million to 6.786 million, against forecasts for a more modest decline to 6.825 million. All in all, this report was encouraging. The labor market has showed surprising resiliency despite the rising COVID case counts and the uncertainty created by the election at the beginning of the month. With that said, both initial and continuing claims remain high on a historical basis, so this report will bear monitoring.
On Friday, the Producer Price Index for October was released. Headline producer prices rose by more than expected during the month, with headline prices going up 0.3 percent against calls for a 0.2 percent rise. Core producer prices, which strip out the impact of food and energy prices, rose by a more modest 0.1 percent, against forecasts for 0.2 percent growth. These results brought year-over-year producer inflation up to 0.5 percent. Core producer prices rose by 1.1 percent on an annual basis. Overall, the two price reports released last week showed that inflation remains under control, as both consumer and producer inflation came in well below the Fed’s stated 2 percent annual inflation target. With the Fed’s current focus on supporting the ongoing labor market recovery, inflation is not expected to drive monetary policy in the immediate future.
We finished the week with Friday’s release of the preliminary University of Michigan consumer sentiment survey for November. This first look at consumer confidence for the month showed an unexpected decline, from 81.8 in October to a three-month low of 77 to start November. This decline was driven by a notable drop in future expectations, which was primarily due to lowered Republican expectations for economic growth. In fact, Republican expectations hit their lowest level since the start of the Trump presidency. Democratic expectations were down modestly to start the month, after rising notably in October, presumably due to heightened expectations for a Biden presidency as the election approached. Historically, improving consumer confidence supports faster spending growth. Accordingly, this disappointing update bodes poorly for consumer spending as we head into the important holiday season.
What to Look Forward To
On Tuesday, the October retail sales report is set to be released. Sales are expected to show 0.5 percent growth during the month, following a 1.9 percent increase in September. Core retail sales, which strip out the impact of volatile auto and gas purchases, are expected to grow by 0.6 percent, following a 1.5 percent increase in September. But the pace of sales growth is set to slow, however, following the better-than-expected September results, which were driven in part by a surge in clothing sales. With that said, we should see continued retail sales growth in October, supported by the later-than-normal Amazon Prime day. If estimates hold, this report would mark six straight months with sales growth, although the pace of growth has slowed notably since earlier in the summer. Looking forward, more moderate gains are expected, as retail sales have already rebounded well past pre-pandemic levels.
Tuesday will also see the release of the October industrial production report. Production is expected to show solid 1 percent growth during the month, following a disappointing 0.6 percent decline in September. The September result was due primarily to a drop in manufacturing output during the month. In October, economists expect manufacturing output to rebound and rise by 1 percent. If estimates hold, this report would mark a return to growth for this important sector of the economy. Nonetheless, the pace of recovery for producers would remain below that for consumers. Demand remains strong, which should serve as a tailwind for future production growth. We have, however, seen a gap between increased consumer demand and manufacturing output since lockdowns ended, as producers have been slower to adapt to the pandemic economy.
The third major data release on Tuesday will be the release of the National Association of Home Builders Housing Market Index for November. This measure of home builder confidence is expected to remain unchanged at 85. If estimates hold, this release would tie the record high the index set in October. Home builder confidence has rebounded impressively following the end of lockdowns, as record low mortgage rates have driven prospective home buyers into the market in droves. But supply has remained constrained in key markets, providing a boon for home builder confidence. Historically, an inverse relationship has existed between the supply of homes available for sale and home builder confidence. Accordingly, the low inventory levels should continue to serve as a tailwind for confidence and faster new home construction over the coming months.
Speaking of new home construction, Wednesday will see the release of the October building permits and housing starts reports. Both of these measures of new home construction are expected to show growth during the month. Permits are set to rise by 1.5 percent and starts are expected to show a 2.5 percent gain. Post-lockdown, housing starts have been boosted by high home builder confidence and low inventory in key regions. Single family housing starts have been a highlight, hitting their highest level in 13 years in September. This rise in single family homes has helped offset volatility in multifamily starts over the past few months. In the post-pandemic world, shifting home buyer demand has home builders favoring single family homes over condominium or apartment buildings.
Thursday will see the release of the weekly initial jobless claims report for the week ending November 14. Economists expect to see that 710,000 initial unemployment claims were filed during the week, which would be a slight increase from the 709,000 filed the week before. Continuing unemployment claims are expected to show a continued decline. Still, despite the very real progress we have made in lowering initial and continuing unemployment claims since lockdowns ended, they remain high on a historical basis. The fact demonstrates the continued stress on the labor market. For context, if the estimates for November 14 prove accurate, initial claims would still be more than three times higher than the weekly average from 2019. These weekly releases will continue to be widely monitored until initial and continuing claims are back down to historically normal levels.
We’ll finish the week with Friday’s release of the October existing home sales report. Sales of existing homes are expected to decline by 1.6 percent during the month, following a much better-than-expected 9.4 percent increase in September. Nonetheless, if estimates hold, this report would represent the second-best month for existing home sales since 2006, highlighting the impressive rebound in sales since lockdowns ended. On a year-over-year basis, existing home sales are expected to show a 19.2 percent increase since October 2019, demonstrating the strength of the housing market recovery. Looking forward, the major headwind for housing sales is expected to be a lack of available inventory. At the end of September, inventory was down more than 19 percent on a year-over-year basis. Given the low level of available inventory and the strong rise in home sales this year, the anticipated modest decline in sales in October is understandable and nothing to worry about for the time being.
That’s it for this week—thanks for reading and stay safe!
