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Last week’s economic updates came in mixed, with solid reports on retail sales and consumer confidence offsetting a modest uptick in inflation and disappointing industrial production results. Given the importance of consumer spending to the overall economy, the positive reports represent a good tailwind for economic growth to start the year. This week, the focus will be primarily on housing-related updates, with forecasts for continued year-over-year growth in this important sector of the economy.
Last week’s news
On Thursday, the release of January’s Consumer Price Index report showed that consumer prices increased by 0.1 percent during the month. This result brought year-over-year growth to 2.5 percent, marking a slight increase from the 2.3 percent year-over-year inflation rate we saw in December. Core consumer prices, which strip out the effect of volatile food and energy prices, rose by 0.2 percent in January and 2.4 percent year-over-year. Even with the slight monthly uptick, and three interest rate cuts by the Fed last year, inflation remains modest. As Fed board members have indicated that they’re comfortable with inflation coming in above their 2 percent target, we have no major cause for concern regarding inflation for the time being.
Friday saw the release of January’s retail sales report. Headline sales grew by 0.3 percent, marking four straight months of growth. Retail sales that exclude volatile auto and gas purchases came in even better, with a 0.4 percent uptick in January, against estimates for 0.3 percent growth. Sales of building materials and furniture were two of the fastest-growing categories during the month, spurred on by mild weather and a strong housing market. Given the improving consumer sentiment reported in January, this spending growth is encouraging, as increased confidence supports additional spending. Consumer spending was a major driver of GDP growth in 2019, so this strong start for 2020 is a good sign for overall economic growth.
Friday also saw the release of January’s industrial production report. Production declined by 0.3 percent, against expectations for a 0.2 percent drop. This result was caused in large part by a slowdown in utilities output driven by the mild weather. We experienced the fifth warmest January over the past 126 years, which led to less energy consumption. Manufacturing output declined by 0.1 percent in January, which was in line with expectations. This drop was largely driven by Boeing’s decision to temporarily halt production on the 737 Max aircraft, as manufacturing output excluding aircraft rose by 0.3 percent during the month. Despite the headwinds from Boeing, the solid output excluding aircrafts and the better-than-expected producer confidence in January indicate that manufacturing may be starting to rebound following a disappointing 2019.
Finally, we finished the week with the first reading of the University of Michigan consumer sentiment survey for February. Sentiment increased from 99.8 in January to 100.9 in February, despite forecasts for a slight decline to 99.5. This result brought the index to its highest level in nearly two years. The surprisingly strong January employment report, combined with positive equity markets and a healthy housing market, helped bolster consumer confidence. This is especially impressive given the continued spread of the coronavirus, which has created uncertainty regarding global growth. The February reading marks a strong turnaround for the index, which hit a three-year low of 89.8 last August. These welcome results highlight the continued resilience of the American consumer and bode well for future economic growth.
What to look forward to
We’ll start the week with Monday’s release of the National Association of Home Builders Housing Market Index for February. This gauge of home builder confidence dropped one point, to 74, against expectations to remain steady. The index sits two points below a 20-year high. Home builder confidence has been supported by very strong home buyer demand, as demonstrated by the subindex that tracks prospective buyer traffic, which hit its highest level since 1998 in December. Falling mortgage rates and high consumer confidence have been driving more prospective buyers into the market, though supply continues to be a constraint. Home builders have noticed and ramped up construction accordingly.
Speaking of construction, on Tuesday, January’s building permits and housing starts reports will be released. Permits are expected to show moderate 2.1 percent growth, while starts are set to decline by 12.9 percent. While this anticipated drop in housing starts is notable, starts can be very volatile on a monthly basis, as evidenced by the 16.9 percent increase seen in December. Despite their tendency to fluctuate, housing starts showed a clear upward trend throughout 2019. Constrained supply and high buyer demand made home builders eager to start new construction as quickly as possible. If the estimates for January are accurate, housing starts will be at their second-highest monthly level since 2006, giving us no cause for concern.
Tuesday will also see the release of January’s Producer Price Index. Producer inflation is slated to increase by 0.1 percent during the month and 1.6 percent year-over-year. Core prices that exclude volatile food and energy prices are set to increase by 0.2 and 1.3 percent for the month and year, respectively. As noted with consumer prices, inflation remains muted despite the Fed’s supportive rate cuts last year. This measure of producer inflation has been below the Fed’s 2 percent target since May 2019.
On Wednesday, the minutes from the January FOMC meeting will be released. The Fed unanimously voted to keep the federal funds rate unchanged at this meeting. Given this decision, as well as recent testimony from Fed Chairman Jerome Powell to Congress, the minutes are unlikely to contain any major surprises. We may get some commentary regarding the Fed’s plans to unwind its ongoing involvement in the repurchase market. Overall, however, the minutes are expected to give us an insight into the Fed’s views on the current economic expansion rather than revelations.
We’ll finish out the week with Friday’s release of January’s existing home sales report. Economists are forecasting a modest decline of 1.2 percent, following a 3.6 percent gain in December. Despite such a drop, the forecasted result would represent more than 10 percent growth on a year-over-year basis. It would also mark seven straight months with year-over-year growth, demonstrating a very solid turnaround from the prolonged slowdown in sales throughout 2018. Housing’s rebound has been one of the bright spots of the economic expansion, so a continued recovery would be quite welcome.
That’s it for this week—thanks for reading!
