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Last week saw a number of important economic updates, with a focus on June’s inflation and retail sales reports. Retail sales were a highlight, as the pace of sales increased by more than expected during the month. This will be another busy week for updates, which will address the housing market, weekly initial jobless claims, and more.
Last Week’s News
On Tuesday, the Consumer Price Index for June was released. Consumer prices increased by more than expected during the month, with headline consumer prices up 0.9 percent against expectations for a 0.5 percent increase. On a year-over-year basis, consumer prices went up by 5.4 percent, a higher result than the 4.9 percent increase forecasted by economists. Food, energy, and housing prices increased during the month, but inflation was widespread across most sectors. Core consumer prices, which strip out the impact of volatile food and energy prices, increased by 0.9 percent and 4.5 percent on a monthly and year-over-year basis, respectively. These results were above economist estimates for a 0.4 percent increase in core prices during the month and a 4.0 percent annual rise. Some of year-over-year growth for both headline and core consumer inflation is due to base-effect comparisons with data from last summer, when the pandemic weighed on prices. In addition, however, consumer prices have seen upward pressure over the past few months due to high demand and slim business inventories.
Wednesday saw the release of the Producer Price Index for June. Producer prices also rose by more than expected during the month. Headline producer prices increased by 1 percent in June against calls for a more modest 0.6 percent increase. On a year-over-year basis, producer prices rose by 7.3 percent, against the 6.7 percent expected increase. Core producer prices, which strip out food and energy prices, also increased, going up by 1 percent monthly and 5.6 percent year-over-year. The forecasts were for a 0.5 percent and a 5.1 percent increase on a monthly and year-over-year basis, respectively. As was the case with consumer inflation, producer inflation was widespread and seen in most sectors during the month. Producers have had to contend with rising material costs and tangled global supply chains throughout much of the year. In addition, rising labor costs have recently started to contribute to inflationary pressure. Notably, members of the Fed have continued to reiterate the view that inflation is largely a product of the economic recovery and will prove to be transitory. Nonetheless, rising inflation remains a risk that market participants are closely monitoring.
On Thursday, the initial jobless claims report for the week ending July 10 was released. The report showed that 360,000 claims were filed, in an improvement from the upwardly revised 386,000 initial claims filed the week before. This report marks the fewest number of initial unemployment claims in a week since the start of the pandemic. It shows the impressive progress we’ve made this year in reducing weekly initial claims, which has been driven in large part by improvements on the public health front and the associated nationwide reopening efforts. Looking forward, high levels of business confidence and consumer demand are expected to continue to serve as a tailwind for further improvements for the labor market. Nonetheless, real work must be done to get us back to pre-pandemic employment levels.
Thursday also saw the release of the June industrial production report. Production increased by 0.4 percent during the month, slightly below economist estimates for a 0.6 percent increase. Despite the miss against expectations, this report marks four consecutive months with increased industrial production following a weather-related slump in February. This gain was primarily driven by rising utility usage and mining output. Manufacturing production declined by 0.1 percent in June, due almost solely due to a 6.6 percent drop in auto manufacturing. The global semiconductor shortage has been a headwind for auto production over the past few months. As the economic recovery progresses, however, plans for increased semiconductor production should help ease the bottleneck. Manufacturing output excluding auto production increased by 0.4 percent in June. This indicates that high levels of consumer demand and low business inventories continued to serve as a tailwind for most manufacturers in June.
On Friday, the June retail sales report was released. Retail sales beat expectations, rising by 0.6 percent during the month, against forecasts for a 0.3 percent decline. This result was broad-based, as sales increased across a variety of sectors. Restaurant, clothing, and appliance sales were notably strong, as consumers continued to show high levels of pent-up demand. But although most sectors saw increased sales, auto sales fell, driven by the low supply of cars for sale and rising prices. Core retail sales, which strip out the impact of volatile auto and gas sales, increased by 1.1 percent in June, surpassing the expected 0.5 percent increase. Overall, retail sales have been supported this year by public health improvements, the nationwide reopening efforts, and the tailwind provided by federal stimulus payments. Looking forward, economists expect to see further consumer spending growth as the economic recovery continues.
We finished the week with Friday’s release of the preliminary estimate of the University of Michigan consumer sentiment survey for July. Surprisingly, this report showed that confidence dropped, falling from 85.5 at the end of June to 80.8 to start July. The forecasts were for an increase to 86.5. This disappointing result brought the index to its lowest level since February, signaling growing consumer concern regarding the economic recovery. Rising prices were the primary cause for the decline in confidence. Increased costs for big-ticket items such as cars and homes weighed on consumer purchasing plans and sentiment. Consumer expectations for inflation over the next year increased from 4.3 percent in June to 4.8 percent to start July, marking the highest level for this reading since 2008. Ultimately, this report served as a reminder that a great deal of work to be done to get economic activity back to pre-pandemic levels and that there may setbacks along the way.
What to Look Forward To
Monday saw the release of the National Association of Home Builders Housing Market Index for July. Home builder confidence slipped slightly during the month, with the index falling from 81 in June to 80 in July, against calls for an increase to 82. This report marks two consecutive months with declining home builder confidence, although the index remains above pre-pandemic levels. Additionally, this is a diffusion index, where values above 50 indicate expansion, so this report signals that home builders have continued to build in earnest. The housing market has benefited from record low mortgage rates and high levels of prospective home buyer demand ever since initial lockdowns were lifted last year. Nonetheless, rising material and labor costs have recently started to weigh on home builder sentiment. Still, despite the headwinds created by rising construction costs, high levels of prospective home buyer demand and low inventory of homes for sale should support healthy levels of home builder confidence and new home construction in the months ahead.
On Tuesday, the June building permits and housing starts reports are set to be released. These two measures of new home construction are expected to show growth during the month. Permits and starts are set to rise by 1 percent and 1.2 percent, respectively, if estimates hold. As these results would bring the pace of new home construction well above pre-pandemic levels, they would be seen as a positive sign for the overall housing industry. Given the lack of available homes for sale and the high levels of home builder confidence in June, it’s possible we’ll see the pace of construction improve by more than expected. Falling timber prices may serve as an additional tailwind for construction growth, and home builders have a large backlog of homes permitted for construction but not yet started. Looking forward, lack of supply is expected to be the main challenge for the housing market, so any improvement in the pace of construction would be seen positively.
Thursday will see the release of the initial jobless claims report for the week ending July 17. Economists expect to see 350,000 initial unemployment claims filed during the week, marking an improvement from the 360,000 initial claims filed the week before and a new pandemic-era low. The anticipated result would also bring the four-week moving average of claims to a new low. Still, although we’ve seen steady progress in getting initial layoffs down over the course of the year, work remains to be done to return to pre-pandemic levels. Throughout 2019, weekly initial jobless claims averaged roughly 220,000 per week. Ultimately, the overall pace and path of the economic recovery will likely depend in large part on the speed of the labor market recovery. Accordingly, this weekly release will continue to be closely monitored, as it provides an up-to-date look into the ongoing recovery.
We’ll finish the week with Thursday’s release of the June existing home sales report. Home sales are expected to increase by 1.7 percent, following a 0.9 percent decline in May. If estimates prove accurate, this report would break a fourth-month streak of declining sales and keep the pace of sales well above pre-pandemic levels. Housing sales rebounded impressively once initial lockdowns were lifted last year, driven in large part by record low mortgage rates and shifting home buyer preferences due to the pandemic. Throughout much of this year, however, we have seen the pace of sales slow due to a lack of homes available for sale and rising prices. Looking forward, the supply constraints are expected to serve as a headwind for significantly higher levels of existing home sales. If, however, sales stay near current levels, they would represent an improvement compared with pre-pandemic data and demonstrate the continued strength of buyer demand.
That’s it for this week—thanks for reading!
