The Independent Market Observer

Monday Update (on Tuesday): Retail Sales Slide to End the Year

Posted by Sam Millette

This entry was posted on Jan 18, 2022 11:23:15 AM

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In his Monday Update, Commonwealth’s Sam Millette highlights December’s inflation and retail sales reports, the housing sector, and consumer sentiment.There were a number of important economic data reports last week, with a focus on December’s inflation and retail sales reports. Retail sales came in well below expectations, as inflation and the Omicron variant weighed on spending during the month. This will be another busy week for updates, with a focus on the housing sector.

Last Week’s News

On Wednesday, the Consumer Price Index for December was released. Consumer prices rose by 0.5 percent during the month. This result was down from the 0.8 percent increase in November but slightly above economist estimates for a 0.4 percent gain. On a year-over-year basis, consumer prices went up by 7.0 percent, in line with expectations and marking the highest level of year-over-year consumer inflation since 1982. Core consumer prices, which strip out volatile food and energy prices, rose by 0.6 percent during the month and 5.5 percent year-over-year. These results were slightly higher than economist estimates for a 0.5 percent monthly and 5.4 percent year-over-year increases. Throughout much of 2021, consumer prices experienced upward pressure, fueled by high levels of pent-up consumer demand, thin business inventories, and tangled global supply chains. Looking forward to the rest of 2022, the Fed is expected to focus on combatting inflation as it works to normalize monetary policy.

Thursday saw the release of the Producer Price Index for December. Producer prices increased by 0.2 percent during the month This result was down notably from the upwardly revised 1 percent increase recorded in November and below estimates for a 0.4 percent rise. On a year-over-year basis, producer prices increased by 9.7 percent in December, slightly below estimates for a 9.8 percent rise and down modestly from the 9.8 percent year-over year producer inflation seen in November. Core producer prices, which strip out the impact of volatile food and energy prices, increased by 0.5 percent and 8.3 percent on a monthly and year-over-year basis, respectively. As was the case with consumer prices, producer prices have been pressured over the past year due to supply chain constraints. In addition, producers have contended with rising material and labor costs, which contributed to the inflationary pressure throughout the year.

On Friday, the December retail sales report was released. The results were disappointing, as headline sales dropped by 1.9 percent in December against calls for a more modest 0.1 percent decline. This report marks the first month with declining sales since July 2021. This fact signals that rising medical risks and inflationary pressure weighed on consumer spending as we finished out the year. The declines were widespread, as 10 of the 13 categories in the report showed a drop in sales in December, led by an 8.7 percent drop in nonstore sales. Core retail sales, which strip out the impact of auto and gas sales, fell by 2.5, against calls for a 0.2 percent decline. Despite the miss against expectations, earlier strength in consumer spending growth, as recorded throughout the past quarter and year, helped blunt the disappointment. In the months ahead, given the importance of consumer spending to the overall economic recovery, this release will be widely monitored.

Friday also saw the release of the December industrial production report. Industrial production declined by 0.1 percent during the month, in a result below economist estimates for a 0.2 percent increase. November’s report was revised up from 0.5 percent to 0.7 percent growth, which partially explains December’s miss against expectations. Capacity utilization declined modestly in December, signaling that rising medical risks and plant shutdowns contributed to the slowdown in production. Manufacturing production, the major driver of November’s increasing industrial production, was down 0.3 percent in December, against calls for a 0.3 percent increase. Given the continued case growth in January 2022, it’s possible we’ll continue to see the medical risks negatively affect production growth. Due to the high business and consumer demand for finished goods, however, any slowdown in production growth is expected to be temporary.

We finished the week with Friday’s release of the preliminary estimate of the University of Michigan consumer sentiment survey for January. Consumer sentiment fell by more than expected. The index dropped from 70.6 in December to 68.8 to start the new year, against calls for a drop to 70. This result brought the index close to the recent low of 67.4 seen in November, signaling continued consumer unease. The larger-than-expected drop was largely due to a decline in the future expectations subindex, which partly due to rising inflation expectations. Both the 1-year and 5- to 10-year consumer inflation expectations increased, despite messaging from the Fed that it is committed to combatting inflation in the new year. The current conditions subindex also declined during the month, likely due in part to the rise in case growth caused by the Omicron variant. Historically, higher levels of confidence have supported faster spending growth, so this release will continue to be widely monitored.

What to Look Forward To

On Tuesday, the National Association of Home Builders Housing Market Index for January was released. Home builder confidence dropped modestly to start the year, as the index fell from 84 in December to 83 in January against calls for no change. This is a diffusion index, where values above 50 indicate expansion, so this result signals continued construction growth despite the decline. Home builder confidence has remained in solid expansionary territory following the expiration of initial lockdowns in 2020. Since then, high levels of home buyer demand and a lack of homes for sale has supported faster construction growth. Home builder confidence sits well above pre-pandemic levels, signaling more construction growth in the months ahead. The continued strength of home builder confidence is impressive, given the headwinds caused by rising material and labor costs for homebuilders. Today’s report indicates a healthy housing sector to start the new year.

Speaking of new home construction, Wednesday will see the release of the December building permit and housing starts reports. These measures of new home construction are expected to show a modest decline, following larger-than-anticipated increases in November. Permits are set to drop by 0.7 percent in December, after rising by 3.6 percent in November. Starts are set to go down by 1.7 percent, following an 11.8 percent surge in November. These reports can be quite volatile on a month-to-month basis. Throughout the pandemic, however, the pace of new home construction has remained above pre-pandemic levels. Record low mortgage rates and a desire for more space due to the pandemic supported a surge in home buyer demand. As existing homeowners were hesitant to put their homes up for sale, newly built homes sold quickly throughout 2021.

We’ll finish the week with Thursday’s release of the December existing homes sale report. Sales of existing homes are set to decline by 0.8 percent, following a better-than-expected 1.9 percent increase in November. Still, the pace of sales is expected to remain well above pre-pandemic levels despite the anticipated drop. In fact, if estimates prove accurate, existing home sales would be up by 12.6 percent on an annual basis, compared with the pre-pandemic high recorded in February 2020. As previously mentioned, the housing sector has been supported throughout the pandemic by low mortgage rates and high home buyer demand. Looking forward, the low supply of homes for sale, rising prices, and rising mortgage rates may serve as a headwind for significantly faster growth of existing home sales. If we continue to see sales near current levels, however, they would signal a healthy housing sector.

That’s it for this week—thanks for reading!

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