Last week was relatively quiet in terms of economic updates, with only three major data releases. The January Consumer Price Index showed that headline and core consumer inflation remained well constrained to start the year. This week will be busier, as a number of important economic updates are scheduled for release. The January retail sales report will be widely followed, as it is expected to show a return to retail sales growth.
Last Week’s News
On Wednesday, the January Consumer Price Index was released. Headline consumer prices rose by 0.3 percent, which was in line with expectations and a slight increase from December’s downwardly revised 0.2 percent increase. Core consumer inflation, which strips out the impact of volatile food and energy prices, showed no change. This result was below economist estimates for a 0.2 percent increase. On a year-over-year basis, both headline and core consumer prices rose by 1.4 percent in January, below the forecast for a 1.5 percent annual inflation rate. Consumer inflation has picked up since hitting a year-over-year low of 0.1 percent in May 2020, but this report showed the continued impact of the deflationary pressure created by the pandemic. The pace of consumer inflation remains well below the 2.5 percent year-over-year growth rate we saw in January 2020. Despite the modest increase in headline consumer prices to start the year, consumer inflation remains well constrained and below the Fed’s stated 2 percent inflation target.
Thursday saw the release of the initial jobless claims report for the week ending February 6. The number of initial unemployment claims fell during the week, declining from 779,000 the week before to 793,000. While claims have been volatile on a weekly basis, the number of initial claims has dropped notably after rising to start the year. The recent improvement for weekly unemployment data is likely due in large part to the positive impact from diminished state and local restrictions, as the improving public health situation has helped reduce lockdown-related layoffs. Despite the improvement, however, the number of weekly initial unemployment claims remains high on a historical basis. This indicates continued stress on the labor market. We can hope mass vaccination efforts will allow for a return to more normal economic conditions later in the year. For the time being, however, this release will continue to be closely monitored.
On Friday, the preliminary estimate of the University of Michigan consumer sentiment survey for February was released. This widely followed measure of consumer sentiment unexpectedly fell from 79 in January to 76.2 to start February, against forecasts for an increase to 80.9. This disappointing result was primarily driven by a decline for the future expectations index, which fell from 74 to 69.8. This surprising result brought the future expectations index to its lowest level since August 2020, which in turn caused the overall index to fall to a six-month low in February. Responses remained split based on political party. Republican and Independent respondents saw lowered sentiment and expectations, while Democrats saw sentiment and expectations increase. We have seen a similar partisan split in responses to this survey since the November election. Given the political nature of the responses, it is unlikely that the decline in headline confidence will have a measured impact on consumer spending during the month. Nonetheless, given the historical relationship between improving confidence and faster spending growth, consumer sentiment will continue to be an important area to monitor.
What to Look Forward To
Wednesday will see the release of the January Producer Price Index. Producer prices are expected to rise by 0.4 percent during the month, up from a 0.3 percent increase in December. Core producer prices, which strip out the impact of volatile food and energy prices, are expected to show a more modest 0.2 percent monthly increase. On a year-over-year basis, headline producer prices and core producer prices are expected to rise by 0.8 percent and 1.1 percent, respectively. As was the case with consumer inflation, producer inflation has picked up moderately since initial lockdowns were lifted last year. Still, overall inflation remains relatively low due to the deflationary pressures created by the pandemic. Ultimately, this report is expected to show continued low levels of producer price pressure to start the year.
Wednesday will also see the release of the January retail sales report. Retail sales are expected to grow by 1 percent during the month, following a 0.7 percent decline in December. If estimates hold, this report would mark the first month with retail sales growth since September 2020. Some of the anticipated growth in January is due to rising gas prices. Core retail sales, which strip out volatile auto and gas sales, are expected to show a more modest 0.5 percent increase. Retail sales are expected to benefit from the additional federal stimulus passed at the end of December and the improving public health situation, which led to a decline in state and local government restrictions. As stimulus checks hit bank accounts, the higher-frequency consumer spending data showed a noted uptick in activity toward the month-end, which should support the return to sales growth. Given the importance of consumer spending to the overall economic recovery, retail sales growth to start the new year would be a positive signal for growth during the first quarter.
The third major release on Wednesday will be the January industrial production report. Industrial production is slated to rise by 0.4 percent during the month, following a 1.6 percent increase in December. The better-than-expected result in December was largely driven by increased manufacturing output, as manufacturing production rose by 0.9 percent to end the year. Economists have forecasted a 0.7 percent increase for manufacturing production in January. This anticipated growth for both industrial and manufacturing production in January is supported by high levels of business confidence. The anticipated gap between industrial and manufacturing production is due to unseasonably warm weather in January, which likely held back energy and overall industrial production. If estimates hold, this report would signal that the manufacturing recovery we saw throughout much of last year continued into the start of the new year.
Wednesday will also see the release of the National Association of Home Builders Housing Market Index for February. This widely followed gauge of home builder confidence is expected to remain unchanged at 83 during the month. If estimates hold, this result would leave the index near the all-time high of 90 it hit in November 2020. Home builder confidence has rebounded notably since the index hit a pandemic-induced low of 30 in April 2020. The index is expected to remain well above the pre-pandemic high of 76 it hit in December 2019. Home builder confidence has been boosted by record low mortgage rates, which have driven additional buyers into a market with a low supply of existing homes for sale. Given the continued low levels of supply and the high demand for housing, home builder confidence is expected to remain strong for the foreseeable future. This should support continued healthy levels of new home construction.
Wednesday’s final major data release will be the release of the FOMC minutes from the Fed’s January meeting. No major changes to monetary policy were made, so the minutes are not expected to hold any substantial new information. We’ll likely get some discussion between Fed members regarding the Fed’s asset purchase program, but the central bank indicated at the meeting there would be no changes to the current program for the foreseeable future. The minutes are expected to show some additional conversation focusing on the Fed’s evolving view of the pandemic and the mass vaccination efforts, which were picking up steam when the FOMC last met. Ultimately, these minutes are likely to reinforce the Fed’s continued commitment to providing supportive monetary policy until we see further substantial progress in combatting the pandemic and getting people back to work.
On Thursday, the January building permits and housing starts reports are set to be released. During the month, permits and starts are expected to fall by 2 percent and 0.7 percent, respectively. Both of these measures of new home construction grew by more than expected in December, so a modest pullback is understandable. December’s strong results brought permits and starts up to their highest levels since 2006, so the anticipated decline in January is nothing to worry about for the time being. Looking forward, however, rising timber prices and fewer available lots for building could be headwinds for significantly faster levels of new home construction. Single-family housing construction has been especially impressive over the past year, as starts for this segment saw eight straight months of growth to finish out 2020. If estimates for permits and starts prove to be accurate, this report would be another signal that the housing market entered 2021 with healthy levels of growth.
Thursday will also see the release of the initial jobless claims report for the week ending February 13. Economists expect to see 760,000 initial unemployment claims filed during the week, which would be a modest improvement from the 793,000 initial claims filed the week before. If this estimate proves accurate, the number of weekly claims would hit its lowest level since November 2020, likely reflecting the positive impact from diminishing state and local restrictions. Still, although we have made progress in getting unemployment claims down from the record highs established during the initial lockdowns, the level of weekly initial claims remains very high on a historical basis. This indicates continued stress for the labor market. Given the high levels of initial claims, this weekly report will continue to be widely monitored, as it gives economists a relatively up-to-date look at the health of the job market.
We’ll finish the week with Friday’s release of the January existing home sales report. Sales of existing homes are expected to fall by 3 percent during the month, following a 0.7 percent increase in December. Existing home sales have already rebounded well past pre-pandemic levels. If the estimate holds, their pace would remain near the 14-year high recorded in October 2020. In January, existing home sales are expected to grow by 21 percent on a year-over-year basis. This result would highlight the impressive surge in home-buyer demand we experienced over the past year. Housing was one of the best-performing sectors of the economy once initial lockdowns were lifted. Continued sales growth near current levels would indicate the continuing health of the housing market to start the new year, despite low levels of supply and rising prices.
That’s it for this week—thanks for reading and stay safe!