Last week saw the release of a number of important economic updates. March’s inflation reports drew much of the attention, along with news on retail sales and consumer sentiment. The reports showed consumer and producer inflation picking up in March, in part due to rising energy costs. Nonetheless, retail sales growth remained solid during the month, and consumer sentiment improved to start April. This week will be busy once again, with a focus on the housing market update.
Last Week’s News
On Tuesday, the March Consumer Price Index was released. Consumer prices increased by 1.2 percent, up from February’s 0.8 percent rise but in line with economist expectations. On a year-over-year basis, consumer prices grew by 8.5 percent in March, up from a 7.9 percent gain in February and slightly higher than the 8.4 percent annual increase expected. Most of this acceleration was due to the rising energy prices caused by an 18.3 percent increase in the cost of gas. Core consumer prices, which strip out the impact of volatile food and energy prices, were much more encouraging. In March, core prices increased by 0.3 percent, marking the lowest monthly increase since September 2021. Year-over-year, core consumer prices rose by 6.5 percent, for a result below the 6.6 percent increase expected. Notably, this core indicator benefitted from lower prices for used autos. March also gave us signs that the supply chain issues evident for the past year have started to improve. Overall, however, there is still work to be done.
Wednesday saw the release of the Producer Price Index for March. As was the case with consumer prices, producer prices rose at a faster pace in March. Headline consumer prices increased by 1.4 percent, above estimates for a 1.1 percent rise and February’s 0.9 percent gain. On a year-over-year basis, producer prices rose by 11.2 percent, up from 10.3 percent increase in February and above forecasts for a 10.6 percent gain. Core producer prices, which strip out the impact of food and energy prices, increased by 1 percent during the month and 9.2 percent year-over-year. Both results were higher than expected. With both headline and core consumer prices, the increases were due in large part to a rise in prices for producer services, including transportation and warehousing. Going forward, however, economists largely expect to see producer inflation peak soon, due to improvements for global supply chains and the Fed’s actions to tamp down inflationary pressure across the economy.
On Thursday, the March retail sales report was released. Headline sales advanced by 0.5 percent, slightly below economist forecasts for a 0.6 percent increase. The modest miss against expectations was understandable, as the report upwardly revised February’s retail sales growth from 0.3 percent to 0.8 percent. Core retail sales, which strip out the impact of volatile auto and gas sales, advanced by 0.2 percent in March, in line with expectations. The solid headline and core retail sales growth reported was encouraging. Combined with the upward revision to the February report, it shows that consumer spending held up well to start the year, following a temporary lull in December 2021. As consumer spending accounts for the majority of economic activity across the country, this report was a good sign for overall growth for the first quarter.
Thursday also saw the release of the preliminary estimate of the University of Michigan consumer sentiment survey for April. The report showed sentiment brightening, as the index rose from 59.4 in March to 65.7 in April, against calls for a drop to 59. This better-than-expected result was driven by improving sentiment regarding both current economic conditions and future expectations. The index now sits at a three-month high, which is encouraging given that sentiment fell to start the year. Consumer expectations for inflation over the next one and three years did not change in April. The fact that consumers don’t expect to see the recent increases in energy and food costs linger is another good sign. Consumer sentiment in April was supported by the strong job market, as consumers expect to see income increase over the next year at the fastest pace since 2006. All in all, this report was a positive development for the consumer segment. It may signal the start of a rebound for confidence, especially if we see inflationary pressure decline over the next few months.
We finished the week with Friday’s release of the March industrial production report. Industrial production increased by 0.9 percent during the month, following an upwardly revised 0.9 percent rise in February. This strong result came in above the 0.4 percent expected. Manufacturing production in March also beat expectations, with output going up by 0.9 percent against calls for a 0.6 percent rise. The gains were widespread, as mining and utilities output also saw strong growth. Manufacturing capacity utilization continued to improve in March, with the month’s 78.7 percent utilization rate marking the highest level since 2007. Manufacturing output has been solid through the start of 2022. High demand has continued to support increased output despite headwinds created by the pandemic and rising material costs. In the months ahead, strong business demand and solid orders growth are expected to support continued manufacturing expansion.
What to Look Forward To
On Monday, the National Association of Home Builders Housing Market Index for April was released. In line with expectations, this measure of home builder confidence dropped from 79 in March to 77 in April. This is a diffusion index, where values above 50 indicate growth, so this result signals expansion for home builders, just at a slightly slower pace than in March. Home builder confidence has been well supported throughout the past two years. Low mortgage rates, high levels of home buyer demand, and a lack of existing homes for sale have all contributed to faster new home construction growth. That said, this report marks the lowest point for the index since September 2021, reflecting the challenges home builders are facing. So far in 2022, rising material and labor costs have weighed on home builder sentiment. These headwinds are expected to remain, at least for the short term.
Tuesday will see the release of the March building permits and housing starts reports. Both measures of new home construction are expected to slow, with permits and starts set to drop by 1.4 percent and 1.2 percent, respectively. These reports can be very volatile on a month-to-month basis, however, and both permits and starts are well above pre-pandemic levels. So, if estimates prove accurate, the reports would mark very strong levels of home building on a historical basis. February saw housing starts hit their fastest pace since 2006, and permits were not far behind. Given the large home-builder backlogs, low supply of existing homes for sale, and rising prices, new home construction is expected to remain well above pre-pandemic levels. This environment should continue until we see home buyer demand dry up or new construction adds enough units to offset some of supply and demand imbalances in the housing market.
On Wednesday, we’ll get a better look at home buyer demand with the release of the existing home sales report for March. Sales are set to drop by 3.7 percent, following a 7.2 percent decline in February. The large drop in February was mostly due to a surge in existing home sales in January, which likely reflected buyers’ efforts to lock in relatively low mortgage rates. Throughout the first quarter, we’ve seen mortgage rates rise notably. From the start of the year to the end of March, the national average for a 30-year mortgage rate increased from 3.27 percent to 4.9 percent. In the short term, higher rates, low supply of existing homes for sale, and rising home prices are expected to serve as a headwind for sales growth. If the March estimates hold, however, the pace of existing home sales would sit well above pre-pandemic levels, thus continuing to signal high levels of buyer demand.
That’s it for this week—thanks for reading!