The Independent Market Observer

Monday Update: Retail Sales Fall in May

Posted by Sam Millette

This entry was posted on Jun 21, 2021 11:51:32 AM

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In his Monday Update, Commonwealth’s Sam Millette discusses key factors influencing retail sales, producer inflation, durable goods orders, and more.Last week saw a number of important economic data releases, with a focus on retail sales and producer inflation in May, as well as the Fed’s June meeting. Retail sales fell by more than expected, but we saw an upward revision to April’s sales report that helps explain the May decline. This week will be busy once again, with May’s housing sales, durable goods orders, and personal income and spending reports serving as highlights.

Last Week’s News

On Tuesday, the May retail sales report was released. Headline sales fell by 1.3 percent during the month, against an expected 0.8 percent decline. The drop is not as disappointing as it may seem, however, as retail sales growth in April was revised up from 0 percent to 0.9 percent. Core retail sales, which strip out the impact of volatile auto and gas sales, fell by 0.8 percent in May, against calls for no change. As with overall retail sales, April’s core retail sales growth was revised up, moving from a 0.8 percent decline to a 0.1 percent increase. While the results for May’s headline and core retail sales were slightly disappointing, they follow two months with strong levels of stimulus-induced sales growth. So, again, the pullback is not as disappointing as it may seem at first. Looking forward, high levels of consumer confidence and continued reopening efforts are expected to support a return to sales growth.

Tuesday also saw the release of the May Producer Price Index. The report showed that producer prices rose by 0.8 percent during the month, above economist estimates for a 0.5 percent increase. On a year-over-year basis, producer prices increased by 6.6 percent in May, in another result above economist estimates, which called for a 6.2 percent increase. Core producer prices, which strip out the impact of volatile food and energy prices, increased by 0.7 percent during the month and 4.8 percent year-over-year. Part of the large annual increase for headline and core producer prices can be attributed to comparisons with last year’s lockdown-suppressed prices. Still, over the last few months, producers have seen upward price pressure due to the negative effect of rising material costs and supply bottlenecks. Rising labor costs have been cited by some producers as a driver of additional inflationary pressure. According to the Fed, however, these headwinds will fade over the long run as more normal economic conditions return.

The third major data release on Tuesday was the release of the May industrial production report. Industrial production increased by 0.8 percent during the month, a result slightly better than the expected 0.7 percent gain. This report marks three straight months with rising production following the decline in February caused by unseasonably cold weather. Industrial production was supported by the May result for manufacturing output, which showed a gain of 0.9 percent against forecasts for a 0.8 percent rise. Over the past few months, high levels of consumer demand and low business inventory levels have spurred increased production. Nonetheless, rising material costs and shortages have held back overall growth, especially in the hard-hit auto industry. Ultimately, this report showed solid growth for the industrial and manufacturing sectors in May, despite the headwinds created by rising prices and tangled supply chains.

The final major data release for Tuesday was the release of the National Association of Home Builders Housing Market Index for June. This widely followed measure of home builder confidence declined slightly from 83 in May to 81 in June, against calls for no change. This is a diffusion index, where values above 50 indicate expansion, so this result was positive despite the monthly decline. The index remains above the pre-pandemic high of 76 we saw in December 2019. Nonetheless, rising costs and home prices are starting to serve as a headwind for significantly faster growth of new home construction. The subindex that measures prospective home buyer foot traffic fell to its lowest level since January. This indicates that home buyers have begun to feel the impact of limited supply and rising prices. With that said, confidence at current levels signals that home builders plan to continue building new homes in the months ahead.

Speaking of new home construction, Wednesday saw the release of the May building permits and housing starts reports. These measures of new home construction showed mixed results during the month. Permits declined by 3 percent against calls for a 0.2 percent drop, and starts increased by 3.6 percent against forecasts for a 3.9 percent gain. High levels of home buyer demand and low levels of existing homes for sale have served as a tailwind for additional new home construction over the course of the past year. Nonetheless, rising material costs and labor shortages have deterred significantly faster levels of construction. While these headwinds may fade as we head toward a more normal economic environment, they’re expected to constrain overall construction for the time being. With that said, if the pace of construction stays near current levels, it would represent a noted improvement compared with data from much of the last decade.

The final major data release on Wednesday was the release of the FOMC rate decision from the Fed’s June meeting. The Fed cut interest rates to virtually zero last March due to the pandemic, and there were no changes to the federal funds rate at this meeting, as expected. The major news came from the Fed’s updated dot plot projection of future interest rates. This data shows that the Fed expects to see two 25 bps rate hikes in 2023, which is a step up from the one rate hike previously projected. There were no additional hints as to the future path of the Fed’s asset purchase program, which currently consists of $120 billion in monthly purchases. Looking forward, market participants expect the Fed to discuss plans to begin tapering these purchases by the end of the year. Still, any tapering ahead will likely be gradual. The Fed is expected to provide guidance on the path of tapering before announcing any changes to the program.

We finished the week with Thursday’s release of the initial jobless claims report for the week ending June 12. The number of initial unemployment claims rose from 375,000 the week before to 412,000, against calls for a decline to 360,000. This result broke a six-week streak of declining initial claims. Nonetheless, it represents a marked improvement for initial claims compared with data from a week in January 2021, when we hit a high for this year of more than 900,000 initial claims. Improvements on the public health front and the associated easing of state and local restrictions throughout the year have supported the labor market recovery. We’ve seen encouraging signs that the hard-hit leisure and hospitality sector has been a major beneficiary of the nationwide reopening efforts. So, although the June 12 report disappointed modestly against expectations, the labor market is overall in much better condition now than at the start of the year. Additional improvements are expected as long as we keep the pandemic under control and continue to lift state and local restrictions.

What to Look Forward To

On Tuesday, the May existing home sales report is set to be released. Sales of existing homes are set to fall by 2.2 percent during the month, following a 2.7 percent decline in April. If estimates hold, this report would mark four straight months with declining sales, with the seasonally adjusted annual rate of sales set to fall to 5.72 million. This figure is down from the recent high of 6.37 million annual existing home sales recorded in October 2020. Nonetheless, given the swift rebound for this sector once initial lockdowns were lifted last year, the pace of existing home sales is projected to come in above pre-pandemic levels. Over the past year, existing home sales have been supported by low mortgage rates and shifting home buyer preference due to the pandemic. Recently, however, a lack of supply of homes for sale and rising prices have served as a headwind for sales growth. Still, looking forward, sales near current levels would signal continued high levels of home buyer demand despite the headwinds the housing sector faces.

On Thursday, the initial jobless claims report for the week ending June 19 is set to be released. Economists expect to see 380,000 initial claims filed during the week, in an improvement from the 412,000 claims filed the week before. If estimates hold, this report would bring the four-week moving average for initial claims to its lowest level since the start of the pandemic. As previously noted, we’ve made solid progress in getting initial weekly claims down throughout the year. The number of claims remains high on a historical basis, however, indicating continued stress on the labor market. Going forward, the most likely path is additional improvement for the job market. Accordingly, this weekly report will continue to be widely monitored over upcoming months. It gives economists an up-to-date look into the pace and path of the recovery.

Thursday will also see the release of the preliminary estimate of the May durable goods orders report. Economists expect to see durable goods orders rise by 3 percent in May, following a 1.3 percent decline in April. The April decline in orders was mainly due to a drop in volatile aircraft orders. Core durable goods orders, which strip out the impact of transportation orders, are expected to increase by 0.8 percent in May, following a 1 percent increase in April. Core durable goods orders are often viewed as a proxy for business investment, so an increase would be a positive signal for overall business spending. May’s business confidence reports showed high levels of service sector and manufacturer confidence. May’s durable goods orders should show the positive impact that high confidence can have on spending growth. If estimates prove accurate, this report would be encouraging, demonstrating that businesses continued to invest during the month.

On Friday, May’s personal income and personal spending reports are set to be released. Personal spending is expected to increase by 0.3 percent, following a 0.5 percent increase in April. If estimates hold, this report would mark three straight months with personal spending growth. This trend has been powered in large part by the continued reopening efforts across the country and the lingering tailwind from the federal stimulus checks that hit bank accounts in March and April. Personal income has been very volatile on a monthly basis throughout the pandemic, as shifting stimulus payments caused large swings in average monthly income. Economists expect to see a 2.7 percent decline in personal income in May. Previously, we saw a 13.1 percent income drop in April following a record 20.9 percent income increase in March. Still, consumers have been able to increase savings notably over the past year. These high savings levels should support spending growth as the country heads back toward more normal economic conditions.

We’ll finish the week with Friday’s release of the second and final estimate of the University of Michigan consumer sentiment survey for June. According to the preliminary estimate, the index increased by more than expected to start the month. It rose from 82.9 in May to 86.4 in June, against calls for a more modest increase to 84.2. Economists expect to see continued improvement throughout the month, with their average forecast calling for the index to rise to 86.8. If estimates prove accurate, this release would bring the index closer to the pandemic-era high of 88.3 recorded in April. Historically, improving consumer sentiment has supported consumer spending growth, so any further gain for the index would be a positive signal for June’s consumer spending reports. Although work must be done to get confidence back to pre-pandemic levels, the improvement we’ve seen so far this year is an encouraging signal that we’re heading in the right direction.

That’s it for this week—thanks for reading and stay safe!

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