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Last week, a number of important economic updates were released, including September’s inflation and retail sales reports and a first look at consumer confidence in October. The retail sales report was a highlight, as both headline and core sales increased by more than expected due to a rise in spending on consumer goods. This will be another busy week for updates, with a focus on industrial production and the housing sector.
Last Week’s News
Wednesday saw the release of the September Consumer Price Index. During the month, consumer prices increased by 0.4 percent, for a result slightly above economist estimates for a 0.3 percent rise. Year-over-year, consumer prices went up by 5.4 percent, against the 5.3 percent annual increase expected and matching the largest annual increase since 2008. Core consumer prices, which strip out volatile food and energy prices, increased by 0.2 percent during the month and 4 percent year-over-year, in line with expectations. Supply chain constraints and limited business inventories have combined with high levels of pent-up consumer demand to increase inflationary pressure throughout the year. While some of these factors are expected to normalize in the months ahead, high consumer inflation and rising inflation expectations may serve as a headwind for spending growth for the time being. Accordingly, these indicators should be closely monitored.
Wednesday also saw the release of the FOMC minutes from the Fed’s September meeting. There were no major changes to monetary policy at this meeting. At the post-meeting press conference, however, Fed Chairman Jerome Powell indicated that the central bank may start to taper asset purchases by the end of the year. The minutes showed that all participants agreed that moderating asset purchases would be appropriate in the months ahead as long as the economic recovery continues. Although the September employment report showed slowing labor growth, many economists and investors expect the Fed to announce plans to begin tapering at its November meeting. The September minutes indicated that a gradual taper reducing the pace of asset purchases by $15 billion per month is the most likely path forward. This would mean the Fed’s purchases could end as early as June or July of next year, depending on when tapering begins. Given the potential for any change in monetary policy to affect the markets, the November FOMC meeting will be a widely monitored event.
On Thursday, the September Producer Price Index was released. Producer prices increased by 0.5 percent during the month and 8.6 percent year-over-year. These results were slightly below economist estimates for 0.6 percent monthly and 8.7 percent annual producer inflation. Core producer inflation, which strips out the impact of food and energy prices, increased by 0.2 percent in September and 6.8 percent year-over-year. These results were below forecasts for a 0.5 percent monthly and 7.1 percent annual increase. The smaller-than-expected growth in headline and core producer prices was partially due to declining airline and rental car prices, caused by the fears of the Delta variant’s negative impact on travel spending. Prices for goods continued to go up, with much of the increase due to rising energy costs. As was the case with consumer prices, producer prices have seen upward pressure this year due to high levels of demand and low levels of supply. The rising inflationary pressure is one of the factors driving the Fed’s plans to taper asset purchases by the end of the year.
On Friday, the September retail sales report was released. Headline retail sales beat expectations, rising by 0.7 percent against calls for a 0.2 percent decline. In addition, August’s report was revised up to show 0.9 percent sales growth, against the 0.7 percent increase shown in the initial report. Core retail sales, which strip out the impact of volatile auto and gas sales, also impressed, increasing by 0.7 percent against forecasts for a 0.4 percent gain. These encouraging results demonstrated the strength of consumer demand despite rising medical and political risks and lower consumer confidence levels compared with data from earlier in the year. In September, consumer spending growth was primarily concentrated on goods, but spending at restaurants and bars also showed signs of modest growth. Overall, the monthly growth was widespread, as 11 out of the 13 categories in the report saw higher levels of spending. This was an encouraging report, indicating that consumers remain willing and able to spend and drive the ongoing economic recovery.
Finally, we finished the week with Friday’s release of the preliminary estimate of the University of Michigan consumer sentiment survey for October. Confidence declined modestly to start the month, falling from 72.8 in September to 71.4 in October against calls for a rise to 73.1. This result, which brought confidence to its second-lowest level since the start of the pandemic, left the index well below the 2021 high of 88.3 recorded in April. The decline in confidence was due to worsening consumer views on both the current economic situation and future expectations. Consumers remain concerned about short-term inflation, as the average one-year inflation expectation increased from 4.6 percent in September to 4.8 percent to start October. Consumers also indicated that buying conditions for large household goods remain challenging due to lack of supply and rising prices. This was especially true for auto sales, with a record 69 percent of consumers reporting a negative outlook on auto purchases at this time. Overall, this report was disappointing. It highlighted the very real headwinds for consumer confidence and spending in the months ahead.
What to Look Forward To
On Monday, the September industrial production report was released. During the month, production declined by 1.3 percent, in a result well below economist estimates for a 0.1 percent increase. The surprisingly weak result was caused by a weather-driven slowdown in utilities and mining production, as well as a drop in manufacturing output. Manufacturing output declined by 0.7 percent in September, against calls for a 0.1 percent increase. In addition, August’s industrial production and manufacturing output reports were revised downward from modest gains to declines of 0.1 percent and 0.4 percent, respectively. These disappointing results highlight the very real challenges that manufacturers are currently facing. Tangled supply chains, labor shortages, and rising costs have all served as headwinds for faster output growth over the past few months. Motor vehicle manufacturing has been a major drag on overall manufacturing growth, as the global semiconductor chip shortage and a shutdown of large parts of the auto industry led to a sharp drop in motor vehicle production in September. High levels of demand are expected to support additional manufacturing growth in the medium to long term. Still, this report indicates that manufacturers were not immune to the recent economic slowdown. In the months ahead, we may see more turbulence.
Monday also saw the release of the National Association of Home Builders Housing Market Index for October. Home builder confidence improved by more than expected during the month, with the index rising from 76 in September to 80 in October. The forecasts were for a modest decline to 75. This result brought home builder confidence to its highest level in three months, signaling faster expansion for new home building activity. The improvement was widespread, as each of the four geographic regions saw improvements. The strong result was also supported by an increase in prospective home buyer foot traffic in September. The housing sector has been one of the bright spots in the post-lockdown economic recovery, as shifting home buyer preference for more space and low mortgage rates have continued to support high levels of home construction and sales. Although home builders have had to contend with tangled supply chains and rising costs throughout the year, high demand and low inventory of existing homes for sale have supported a surge in new home construction since initial lockdowns expired last year.
Speaking of new home construction, Tuesday will see the release of the September builder permits and housing starts reports. Both measures of new home construction are expected to decline in September, following larger-than-anticipated gains in August. Permits are set to decline by 2.7 percent, following a 5.6 percent increase in August. The forecasts for starts are for a more modest 0.3 percent drop, following a 3.9 percent rise in August. Despite the anticipated declines, both permits and starts should remain well above pre-pandemic levels, highlighting the positive impact from high home builder confidence. The pace of new home construction has increased notably since the end of initial lockdowns last spring, with much of the growth focused on single-family housing. Looking forward, rising rents and a gradual return to work in offices may support more multifamily apartment construction.
On Thursday, the September existing home sales report is set to be released. The pace of sales is expected to increase by 2 percent, supported by low mortgage rates and high levels of home buyer demand. Existing home sales surged late last year. Throughout 2021, we’ve since seen a moderate slowdown in these sales, but they remain well above pre-pandemic levels, signaling high home buyer demand. The slowdown in sales has been primarily due to a lack of homes for sale, which has led to rising prices and bidding wars in supply-constrained markets. In August, the number of homes for sale was down 13.4 percent on a year-over-year basis, and the vast majority of homes spent less than a month on the market before being sold. Looking forward, sales growth near current levels would be a sign of high demand and a relatively healthy housing market. For the pace of existing home sales to rise notably, however, a meaningful increase in the number of homes for sale would likely be needed.
That’s it for this week—thanks for reading!
