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Last week’s economic updates continued to show the devastating impact that shelter-in-place orders had on the economy in April, highlighted by historically bad retail sales and industrial production reports. This week will be relatively quiet for economic updates, with the focus on housing, the FOMC minutes, and the weekly initial jobless claims report.
Last week’s news
On Tuesday, April’s Consumer Price Index was released. Consumer prices fell by 0.8 percent during the month, in line with economist expectations. Year-over-year consumer inflation dropped to 0.3 percent, slightly below expectations for 0.4 percent growth. Core inflation, which strips out the impact of volatile energy and food prices, fell by 0.4 percent during the month, bringing annual core inflation down to 1.4 percent. This indicator didn’t meet expectations for 1.7 percent annual core inflation and is down notably from the 2.1 percent growth rate seen in March. The massive shock to consumer demand created by efforts to battle the spread of the coronavirus is expected to keep holding back inflationary pressures in the short term, despite continued supportive measures from the Fed.
On Wednesday, April’s Producer Price Index was released. Headline producer inflation fell by 1.3 percent during the month, surpassing economist estimates for a 0.5 percent decline. On a year-over-year basis, producer prices fell by 1.2 percent. This deflationary result is the lowest level for annual producer price growth in more than four years. Falling gasoline prices were one of the major drivers of the deflationary pressure on headline producer prices. Core producer inflation, which strips out the impact of volatile gas and food prices, fell by a more modest 0.3 percent in April, bringing the pace of annual core producer inflation to 0.6 percent. Given the deflationary pressure created by the ongoing pandemic, inflation is expected to remain contained.
On Thursday, the weekly U.S. initial jobless claims report for the week ending May 9 was released. An additional 2.9 million initial jobless claims were filed, above economist estimates for 2.5 million. This worse-than-expected result is likely overstating the damage done during the week, however. Connecticut officials have stated that the report inflated the number of initial claims filed in the state by nearly 270,000. Even when accounting for this discrepancy, however, it’s likely that more than 2.7 million Americans filed initial unemployment claims during the week, marking eight straight weeks with more than 2 million job losses per week. The continued weekly decline in initial claims is certainly positive news, but we still have a long way to go before getting back to normal levels.
Friday saw the release of April’s retail sales report. Sales came in below expectations, falling by 16.4 percent on a monthly basis, against forecasts for a 12 percent decline. This result follows an upwardly revised 8.3 percent decline in March, which at the time was the record for the worst decline on record for a single month. For perspective, the worst back-to-back months during the great financial crisis saw sales fall by a combined 6.7 percent. Perhaps more concerning than the headline decrease was the core retail sales figure, which strips out volatile gas and auto purchases. This measure of core consumer spending fell by 16.2 percent in April, far worse than estimates for a 7.6 percent decline. Once again, this plunge represents the worst monthly result on record, easily surpassing last month’s low-water mark of a 2.8 percent decline. Consumer spending has historically accounted for the lion’s share of economic activity. This historic report indicates that the second-quarter GDP report is likely to be significantly worse than the already weak first-quarter results.
Friday also saw the release of the April industrial production report. Industrial production fell by 11.2 percent during the month, slightly beating estimates for a 12 percent decline. Nonetheless, this result represents the worst monthly decline for industrial production on record. As industrial production records go back more than 100 years, including the period of the Great Depression and World War II, April’s report truly highlights the trying times we find ourselves in. As expected, this decline was largely due to a sharp fall in manufacturing output, which dropped by 13.7 percent against expectations for a 14.6 percent decline. Looking forward, further large decreases in production are unlikely in the short term, as large manufacturers started to reopen facilities in May. Still, the historically bad results in April highlight the disruption caused by the pandemic.
Finally, we finished the week with Friday’s release of the first estimate of the University of Michigan consumer sentiment survey for May. This widely followed measure of consumer confidence increased from 71.8 in April to 73.7 in May, against expectations for a decline to 68. This result follows a sharp decline from 89.1 in March. The modest increase leaves the index well below the year-to-date high-water mark of 101 set in February. May’s uptick was driven by increased optimism regarding the current economic situation, as the subindex that measures present conditions increased during the month, although future expectations fell. In part, the increase in the present conditions subindex can be attributed to more Americans receiving stimulus checks in May, but efforts to open up some state economies could have played a role. While the improvement to sentiment was welcome, we still have a long way to go before confidence and spending levels are expected to reach pre-pandemic levels. This report will continue to be widely monitored, especially if we see future setbacks.
What to look forward to
We started the week with Monday morning’s release of the National Association of Home Builders Housing Market Index for May. This measure of home builder confidence increased from 30 in April to 37 in May, slightly better than expectations for a move to 35. Following a steep fall from 72 in March to an eight-year low of 30 in April, this modest rebound leaves the index well below levels seen earlier this year. Home builders cited significant declines in prospective buyers and construction challenges due to measures to combat the spread of the coronavirus as two key factors causing sentiment to plunge in April. This report showed that these headwinds persisted into the beginning of May. Low levels of home builder confidence are expected to slow the pace of new home construction.
Speaking of new home construction, on Tuesday, April’s building permits and housing starts reports are set to be released. These measures of new home construction are expected to show a steep drop-off in the pace of new home construction. Building permits are set to decline by 25.9 percent, while starts are expected to fall by 23.6 percent. That would bring the pace of housing starts to a four-year low, offsetting the gains in the second half of 2019 and the beginning of this year. These reports can be volatile on a month-to-month basis, however. Given the headwinds to the industry and the collapse in home builder confidence in April, further weakness in new home construction is expected.
Wednesday will see the release of the minutes from the April FOMC meeting. No major announcements were made, so the minutes are not likely to reveal major information. There has been some chatter recently about the potential for negative interest rates in the U.S., but Fed Chairman Jerome Powell stated during an interview last week that the Fed does not intend to use negative rates as a policy tool. Instead, the Fed prefers to use other measures to support the economy and markets. We can expect the minutes to reveal additional commentary describing the economic outlook held by various Fed members at the end of the month, so this release will be worth monitoring.
On Thursday, the weekly U.S. initial jobless claims report for the week ending May 16 is set to be released. Economists anticipate the filing of an additional 2.4 million initial unemployment claims during the week. While this result would represent the seventh straight week with declining initial claims, the numbers would remain significantly higher than historical norms. For reference, initial claims averaged just under 220,000 a week throughout 2019. If the estimates hold, this report would show that mass layoffs have continued well into May. We’ll continue to monitor this weekly gauge of the health of the jobs market until levels approach historical norms.
We’ll finish the week with Thursday’s release of April’s existing home sales report. Sales are expected to decline by 18.3 percent during the month, following an 8.5 percent drop in March. With much of the country under shelter-in-place orders in April and home builders citing a large decline in foot traffic, a sharp drop in sales would make sense. If the estimates hold, a nine-month streak of year-over-year growth would be broken for existing home sales, one of the bright spots in the economic expansion in the second half of 2019. Going forward, further weakness in home sales is expected, given the steep drop-off in prospective buyers caused by the coronavirus.
That’s it for this week—thanks for reading and stay safe!
