Monday Update: Mixed Data, But Continued Growth Likely

Last week’s economic data was all over the place, but despite some significant disappointments, the overall tone was positive. With the Federal Reserve raising rates but declining to speed up the process, the most likely path looks to be continued growth at about the same pace we’ve seen recently.

A look at last week’s news

Consumer prices tick up. Headline inflation, as measured by the Consumer Price Index, rose at a rate of 0.1 percent in February, slightly higher than the expected flat result but down from a 0.6-percent increase the previous month on lower gas prices. Due to base effects, however, the yearly rate increased in line with expectations, from 2.5 percent to 2.7 percent.

Core prices, excluding food and energy, rose as expected by 0.2 percent, down from 0.3 percent last month, and the annual rate dropped from 2.3 percent to 2.2 percent, also as expected. Inflation continues to run at five-year highs, above the Fed’s target, which suggests that upward pressure on rates should continue.

Retail sales somewhat disappointing. Retail sales increased by just 0.1 percent in February, down from a 0.4-percent gain the previous month. This wasn’t as bad as it looked, however, as a decline in gasoline prices was a primary cause. Core retail sales, excluding autos and gasoline, did slightly better than expected, with an increase of 0.2 percent, but this was also down from the previous month’s 1.1-percent gain.

The most economically representative number, control group sales, which excludes autos, gas, and building materials, also underperformed expectations, with a 0.1-percent increase. The previous month’s growth was revised up from 0.4 percent to 0.8 percent, however, which made up for the shortfall. Overall, retail sales were somewhat disappointing—healthy enough on a multimonth basis, but not showing any sustained acceleration yet.

Good news from the housing sector. The National Association of Home Builders industry survey data was surprisingly good, with a substantial increase to 71, beating both expectations and the previous result of 65. Housing starts also surprised to the upside, although by less, with an increase to 1.288 million, beating expectations of a small increase from 1.246 million to 1.255 million. Builders are clearly feeling optimistic and acting on those feelings.

Industrial production falls short. Expected to post growth of 0.2 percent, industrial production came in flat for the month, but this was still an improvement from a previous decline of 0.3 percent. The result was also better than it looked, as stronger mining and manufacturing improvements were again offset by weak utility production due to warm weather.

Core manufacturing output demonstrated underlying strength, growing even faster than expected, at 0.5 percent instead of 0.3 percent, and the previous month’s growth was revised up from 0.2 percent to 0.5 percent. Overall, the manufacturing and industrial sector, apart from the weather-affected utilities, continues to show faster growth.

Confidence hits another high. The University of Michigan Consumer Sentiment Index also did better than expected, increasing from an already healthy 96.3 to 97.6, beating expectations of 97.0. A 13-year high, this result is consistent with the other major survey of consumer confidence, conducted by the Conference Board.

Fed hikes rates, as expected. The other big economic news last week was the regular meeting of the Federal Open Market Committee, which raised the federal funds rate by another quarter point. This was widely expected, but the Fed’s accompanying notes and press conference suggested that future rate increases would be modest and in line with expectations (rather than faster), which cheered markets.

The week ahead

This week will be light on the data front. Of note:

• Existing home sales will be announced on Wednesday, with expectations for a small decline, from 5.69 million to 5.59 million, on a shortage of homes for sale. Demand remains strong, but supply is at the lowest level since recordkeeping began 34 years ago.
• New home sales will be released on Thursday and are expected to rise slightly, from 555,000 to 560,000, on improvements in inventory and the shortage of existing homes.
• Durable goods orders will come out on Friday. The headline number is expected to rise by 0.9 percent, down from 2.2 percent the previous month, but there is a significant chance of an upside surprise, based on aircraft orders. Core orders, which exclude transportation and provide a better economic signal, are expected to improve by even more, up 0.5 percent from flat the previous month.

Have a great week!