The focus of last week’s important economic data releases were on consumer inflation, industrial production, and August retail sales. Retail sales increased by more than expected last month, largely driven by a pickup in grocery and online sales. This will be another busy week for updates, including news on the housing sector and the results from the Fed’s September meeting.
Last Week’s News
On Tuesday, the Consumer Price Index for August was released. The report showed the pace of consumer inflation coming in below expectations during the month, with prices rising by 0.3 percent against calls for a 0.4 percent increase. This result is down from the 0.5 percent rise in consumer prices we saw in July. On a year-over-year basis, consumer prices increased by 5.3 percent, in line with expectations. This rate represented a modest decline from the 5.4 percent year-over-year increase reported in July. Core consumer prices, which strip out the impact of volatile food and energy prices, increased by 0.1 percent in August and 4 percent year-over-year. As was the case with headline consumer inflation, core consumer prices increased by less than expected in August. This result was driven in large part by a reversal of some sectors affected by the reopening, such as airline fares, hotel rates, and used car prices, which all declined notably during the month. While consumer price growth remains high on a year-over-year basis, the moderating inflationary pressure in August supports the Fed’s belief that the recent rise in inflationary pressure will prove to be transitory.
Wednesday saw the release of the August industrial production report. Production increased by 0.4 percent during the month, slightly below economist estimates for a 0.5 percent increase. This result follows a solid 0.8 percent gain in July and marks six straight months with increased industrial production. The August gain was largely due to a rise in utilities output, as Hurricane Ida negatively affected manufacturing and mining output. Given the hurricane’s timing at the end of August and start of September, the lingering effects from the storm are expected to serve as a similar headwind for mining output in September. Manufacturing output increased by 0.2 percent in August, below economist estimates for a 0.4 percent increase. That said, July’s manufacturing output growth was upwardly revised from 1.4 percent to 1.6 percent, so the miss against expectations in August is not as negative as it may seem. All in all, this report shows that the rebound in industrial production has continued despite the weather-related disruptions.
On Thursday, the initial jobless claims report for the week ending September 11 was released. The number of initial claims increased by more than expected during the week, increasing from an upwardly revised 312,000 to 332,000, against calls for a more modest increase to 322,000. This rise was partially driven by a spike in claims in Louisiana, as the aftereffects from Hurricane Ida continue to negatively affect economic activity in the region. This weekly measure of initial layoffs across the country can be volatile on a week-to-week basis. Accordingly, given the overall improvement that we’ve seen throughout the year, the rise in claims is nothing to be concerned about at this time. We’ve made solid progress in getting initial claims back down toward more normal historical levels throughout the course of the year. Encouragingly, as public health risks have increased over the past few months, we haven’t seen a large uptick in layoffs.
Thursday also saw the release of the August retail sales report. Sales increased by 0.7 percent during the month, for a result significantly better than the 0.7 percent drop economists expected. Core retail sales, which strip out the impact of volatile auto and gas sales, were even more impressive, increasing by 2 percent against calls to remain flat. This report represents the best month for core retail sales growth since March’s stimulus-fueled record surge in sales. Still, although the monthly sales growth was a positive development, the details of the sales growth are slightly less encouraging. The increase in retail sales was largely driven by a surge in grocery sales and online shopping, which in turn likely reflects rising consumer concerns about the Delta variant. Spending at bars and restaurants was flat in August, which is another sign that rising health risks have affected consumer spending decisions. Still, despite the rotation back toward home-focused spending, the better-than-expected increase in headline and core sales shows that consumers remain willing and able to spend despite rising health risks.
We finished the week with Friday’s release of the preliminary estimate of the University of Michigan consumer sentiment survey for September. To start the month, confidence improved modestly, with the index increasing from 70.3 to 71. The forecasts were for a larger increase to 72. Consumer views on current economic conditions fell slightly, but future expectations saw some improvement. Consumers remain concerned about rising prices, as buying conditions for big-ticket items such as homes and cars worsened due to high costs. Consumer one-year inflation expectations increased from 4.6 percent in August to 4.7 percent in September, but five-year inflation expectations remained unchanged at 2.9 percent. Overall, despite the modest improvement in confidence to start the month, the index remains well below the recent high of 88.3 recorded in April. Historically, improving consumer confidence has led to faster consumer spending growth, so the lackluster result in September may signal future weakness in consumer spending. Going forward, this indicator should be monitored.
What to Look Forward To
On Monday, the National Association of Home Builders Housing Market Index for September was released. This gauge of home builder confidence increased modestly from 75 in August to 76 in September, against calls for a decline to 74. This is a diffusion index, where values above 50 indicate expansion, so this better-than-expected result signals the continued growth of home builder confidence. Last year, this index rebounded swiftly once initial lockdowns were lifted, as record low mortgage rates, high levels of home buyer demand, and limited existing homes for sale supported a surge in home construction. Since then, home builder confidence has declined from the record highs we saw at the end of 2020, due largely to rising costs for materials and labor. Now, although lumber prices have started to normalize, input costs for home builders remain high due to supply chain disruptions and labor shortages. Looking forward, continued high levels of home buyer demand should keep home builder confidence in expansionary territory. In the short term, however, high costs are expected to remain as a headwind for home builders.
On Tuesday, the August building permits and housing starts reports are set to be released. Permits are expected to decline by 2.2 percent, following a 2.6 percent increase in July. Starts are set to rise by 1 percent, after declining by 7 percent in July. Both of these measures of new home construction can be quite volatile on a month-to-month basis, although they rebounded swiftly last year, along with home builder confidence. Single-family housing starts have been a particular highlight, as shifting home buyer preferences for more space due to the pandemic caused a surge in new single-family construction over the past year. Looking forward, rising rents and a return to more normal economic conditions may support an increase in multifamily construction. Throughout the pandemic, this sector has generally lagged compared with single-family housing growth.
On Wednesday, the August existing home sales report is set to be released. Sales of existing homes are expected to fall by 2.3 percent, following a 2 percent increase in July. At the end of last year and start of this year, existing home sales surged. Throughout much of this year, however, the limited supply of existing homes for sale and rising prices have negatively affected sales growth. That said, the pace of existing home sales is expected to remain well above pre-pandemic levels, highlighting the continued strength of the housing market. We saw the supply of homes for sale increase in July, which could signal the housing market’s stabilization following last year’s surge in sales. Still, the number of homes for sale remains relatively low on a historical basis. This factor is expected to dampen the pace of overall sales growth until more homes become available for sale.
Wednesday will also see the FOMC rate decision from the Fed’s September meeting. The Fed cut interest rates to virtually zero at the start of the pandemic, and economists do not expect to see any interest rate hikes until 2023 at the earliest. Accordingly, the meeting’s focus will be on the Fed’s asset purchase program, which currently sees the Fed buying a combined $120 billion in Treasury and mortgage-backed securities a month. These purchases have been used to support the markets throughout the course of the pandemic. Currently, however, there is speculation that the Fed may be ready to start tapering purchases. Some Fed members have come out publicly in favor of tapering asset purchases by the end of the year, but no timeline for tapering has been announced yet. The September meeting will be important in terms of guiding market expectations for the Fed’s tapering plans. Although the timing of the potential tapering efforts is unknown, the Fed is widely expected to slow the pace of asset purchases gradually, in order to minimize the market impact.
We’ll finish the week with Thursday’s release of the initial jobless claims report for the week ending September 18. Economists expect to see the number of initial unemployment claims decline modestly from 332,000 to 320,000. If estimates prove accurate, this report would represent the second-fewest initial claims in a week since the start of the pandemic. While claims can be volatile on a weekly basis, the four-week moving average for initial claims would be set to hit a new pandemic-era low if estimates hold. This would highlight the continued labor market recovery in September. Declining medical risks and loosened restrictions on consumers and businesses supported a reduction in weekly layoffs throughout the spring. Recently, however, labor shortages have also helped drive the number of weekly layoffs down. Given the shortage of potential replacements, businesses remain reluctant to lay off workers.
That’s it for this week—thanks for reading!