Last week saw a number of important economic updates, with a focus on inflation, the Fed’s June meeting, and consumer confidence. June’s consumer confidence report was a highlight, revealing better-than-expected results that bode well for consumer spending growth. This week, which will be relatively quiet, will include important updates on May retail sales and the housing market in May and June.
Last week’s news
On Wednesday, May’s Consumer Price Index was released. Consumer prices fell by 0.1 percent during the month, against expectations for no change. This drop brought the pace of year-over-year consumer inflation to a modest 0.1 percent, the lowest level for this indicator since October 2015. Core consumer prices, which strip out the impact of volatile food and energy prices, also declined by 0.1 percent for the month, against similar expectations to remain flat. As a result, year-over-year core consumer inflation dropped to 1.2 percent from 1.4 percent the month before—marking its lowest level in more than nine years. This inflation report continued to show the massive deflationary pressure caused by the pandemic. Looking forward, this pressure is expected to remain until economic activity picks up notably.
Wednesday also saw the release of the FOMC’s rate decision from the June meeting. As expected, the Fed kept the federal funds rate unchanged at effectively zero. Economic forecasts released at this meeting showed a bleak picture for the economy over the short to intermediate term. The Fed expects to see a 6.5 percent decline in GDP this year and a year-end unemployment rate of 9.3 percent. As a response to this discouraging outlook, the Fed remains committed to keeping rates low for the foreseeable future. All its members expect to keep the federal funds rate at the current level through 2021 at the least, and only two members called for an increase in 2022. The Fed is also committed to continued purchases of Treasury and mortgage-backed securities, a measure known as quantitative easing. So, despite the dire forecasts, the Fed’s commitment to provide as much support as necessary shows that the central bank is ready and willing to pull out all the stops to stimulate the economy through these trying times.
On Thursday, May’s Producer Price Index was released. Producer prices increased by 0.4 percent during the month, surpassing estimates for 0.1 percent growth. As a result, year-over-year producer deflation declined by 0.8 percent during the month, following a 1.2 percent drop in April. Core producer prices, which strip out energy and food prices, fell by 0.1 percent in May, bringing the pace of year-over-year core producer inflation to 0.3 percent—a four-year low. As was the case with consumer inflation, economists are not currently anticipating a swift increase in producer inflation, given the headwinds created by the pandemic and the moderate pace of economic recovery expected.
Thursday also saw the release of the weekly initial jobless claims report for the week ending June 6. It showed that 1.542 million Americans filed initial unemployment claims during the week, down from an upwardly revised 1.897 million initial filers the week before. This result was slightly better than the 1.55 million initial claims forecasted. Continuing unemployment claims, reported with a one-week lag to initial claims, dropped from 21.268 million to 20.929 million. This figure marks the 10th straight week with declining initial claims, indicating that the peak of job losses is likely well behind us. Despite the continued downward trend in initial claims and the economic reopening efforts, initial and continuing claims remain very high.
We finished the week with Friday’s release of the preliminary estimate of the University of Michigan consumer sentiment survey for June. This measure of consumer confidence beat expectations for the month, rising from 72.3 in May to 78.9 in June, against predictions for a more modest increase to 75. The largest single-month increase for the index since 2016, this result indicated that consumers reacted positively to the reopening efforts that began in May. The much-better-than-expected May jobs report and the strong equity market performance over the past couple of months likely contributed to the rise in sentiment. Consumers had a brighter view on both the current situation and future expectations during the month. Although this development was certainly welcome, the index sits well below its pre-pandemic high of 101, set in February. This indicates the pace of the recovery will be moderate.
What to look forward to
On Tuesday, May’s retail sales report is set to be released. Headline sales are expected to increase by 7.9 percent during the month, following a 16.4 percent decline in April. Although an increase would certainly be welcome, it’s important to remember that the pandemic caused headline sales to drop by a combined 23.4 percent between February and April. One of the major drivers of this anticipated increase in headline sales is a rise in auto and gas sales, which rebounded in May as reopening efforts took hold. Core sales, which strip out the impact of volatile auto and gas prices, are set to increase by 4.5 percent in May, following a 16.2 percent decline in April. Again, while the anticipated increase in core sales would certainly be welcome, it will likely be a long time before the overall pace of sales gets back to pre-pandemic levels. As consumer spending accounts for the lion’s share of economic activity, this release will continue to be widely monitored.
Tuesday will also see the release of May’s industrial production report. Production is slated to rise by 3 percent during the month, following an 11.2 percent decline in April. Factories were largely shut down in April and began gradually reopening in May, which explains the anticipated rebound. Manufacturing output is expected to top that gain, with economists forecasting a 5.9 percent increase to follow the 13.7 percent decline in April. Looking forward, both industrial production and manufacturing output are expected to face headwinds created by low energy prices, lowered global demand, and disrupted supply chains due to the pandemic. Compared with service-based sectors, a swift recovery to pre-pandemic levels may be more difficult for the industrial sector.
The third major release scheduled for Tuesday is the National Association of Home Builders Housing Market Index for June. This measure of home builder confidence is slated to increase from 37 in May to 44 in June. This would mark the second month of increased home builder confidence, following the index’s drop to a seven-year low of 30 in April. Despite the anticipated increase, the index would sit far below the recent high of 76 set in December 2019. Home builders cited a steep fall in potential buyer foot traffic due to the pandemic as a major driver of this decline in confidence. But, with the country reopening, potential buyers may come back faster than expected. In turn, such a rebound would likely lead to a faster-than-expected recovery for home builder confidence and spending.
On Wednesday, May’s building permits and housing starts reports are set to be released. Economists expect to see a strong rebound in both measures of new home construction, with permits and starts expected to increase by 14.9 percent and 23.5 percent, respectively. Nonetheless, these solid results would represent only a partial rebound from April, when anticoronavirus measures caused permits to fall by 20.8 percent and starts to plummet by 30.2 percent. As was the case with home builder confidence, the forecasted rebound for permits and starts in May would be a positive development for the housing market. Still, even if estimates hold, this segment has a long way to go before returning to recent highs.
We’ll finish the week with Thursday’s release of the weekly initial jobless claims report for the week ending June 13. Economists expect that 1.295 million initial unemployment claims will be filed during the week, down from 1.542 million the week before. Continuing claims are also expected to fall, from roughly 20.9 million to 19.4 million. If estimates hold, this report would mark the 11th straight week with declining initial claims. While this anticipated decline is welcome, initial and continuing claims both sit well above historical norms, indicating that the jobs market remains under significant stress despite the reopening efforts that began in May. We will continue to monitor these important weekly releases until we see claims return to more normal levels.
That’s it for this week—thanks for reading and stay safe!