Monday Update: Retail Sales Fall Sharply in February

Posted by Sam Millette

This entry was posted on Mar 23, 2020 12:20:00 PM

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In his Monday Update, Commonwealth’s Sam Millette discusses important economic reports for February, and how they signal the effects of the coronavirus.Last week’s updates, which touched on a broad cross section of the economy, mostly showed solid, fundamental improvements during February. That noted, the surprise rate cut by the Fed and a sharp drop in retail sales highlight the effect that the coronavirus will likely have on future reports. This week will be another busy one, with important reports on business and consumer confidence expected to draw the most attention.

Last week’s news

On Sunday, March 15, the Fed announced a surprise rate cut, amid a suite of measures designed to support the economy. Rather than waiting for the release of the FOMC rate decision scheduled for Wednesday, March 18, the Fed decided to go ahead and cut the federal funds rate by a full point, from a range of 1 percent to 1.25 percent down to 0 percent to 0.25 percent. This cut was larger than the 50 bps cut forecasted by economists, but it was largely in line with market expectations. The Fed also announced a return to quantitative easing, with a commitment to purchase at least $500 billion in Treasury securities and an additional $200 billion in mortgage-backed securities over the next few months. These actions were taken in order to help U.S. businesses and consumers weather the storm for the upcoming months. While the tailwind from lower rates and additional liquidity should support the economy, continued market volatility remains likely until progress toward halting the spread of the coronavirus is made.

Tuesday saw the release of February’s retail sales report, which came in significantly below expectations. Retail sales fell by 0.5 percent during the month, against expectations for a 0.2 percent increase. Falling gas prices and lowered auto sales can explain some of the decline in headline sales. But the core sales, which strip out the impact of volatile gas and auto purchases, declined by 0.2 percent, against forecasts for 0.3 percent growth. Given the weakness in both headline and core sales, it certainly appears as if fears regarding the severity of the coronavirus kept consumers from spending toward the end of the month. With declining consumer confidence and the rise of social distancing and self-quarantining, sales are unlikely to show significant growth for the time being. This situation is a concern, given the importance of consumer spending to the overall economy.

Tuesday also saw the release of February’s industrial production report, which showed a slightly more positive picture. Headline industrial production increased by 0.6 percent during the month, beating forecasts for 0.4 percent growth. A rebound in utilities production, spurred by a return to colder weather, was the major driver of the increase in overall production. Manufacturing production came in slightly below expectations, increasing 0.1 percent against forecasts for 0.2 percent growth. Despite the lower output, this result represents a rebound from January’s disappointing 0.1 percent decline. Manufacturer confidence rose into expansionary territory to start the year, which typically supports faster production growth. Going forward, however, both confidence and output are expected to be negatively pressured by the public health crisis.

The National Association of Home Builders Housing Market Index for March was also released on Tuesday. Home builder confidence declined from 74 in February to 72 in March, against estimates for a smaller decline to 73. This indicator had risen throughout 2019, after hitting a low of 56 in December 2018, supported by low mortgage rates that drove prospective buyers into the market. Given widespread social distancing efforts and the recent jump we’ve seen in mortgage rates, further declines in home builder confidence are expected. Most likely, the result will be pressure on new home construction.

Speaking of construction, on Wednesday, February’s building permits and housing starts reports were released. Housing starts declined by 1.5 percent during the month, while permits fell by 5.5 percent. Economists had forecast declines of 4.3 percent for starts and 3.2 percent for permits, so this report was a mixed bag. But these data points can be very volatile on a month-to-month basis. Both starts and permits rose considerably throughout 2019, as increased home builder confidence and a lack of supply in key regions set the stage for a building boom. Despite the declines in February, both measures of new home construction came in near post-recession highs, indicating that home builders continued construction in February.

Finally, on Friday, February’s existing home sales report was released. Sales beat expectations, increasing by 6.5 percent for the month, against forecasts for 0.9 percent growth. This result brought the pace of existing home sales to its highest level since 2007. Housing was a major bright spot in the economy in 2019, supported by high consumer confidence levels and low mortgage rates. On the whole, the data releases related to the housing market in February showed that the impressive growth we saw last year in this important sector of the economy has continued into 2020. Looking forward, as was the case with retail sales, existing home sales growth should be tempered by the escalating social distancing and self-quarantine measures sweeping the nation.

What to look forward to

We’ll start the week with Tuesday’s release of the preliminary Markit U.S. Manufacturing and Services Purchasing Managers’ Index reports for March. These two measures of nationwide business confidence will reflect surveys submitted last week, giving us a relatively up-to-date view on business confidence in the face of the escalating crisis. Both measures are set to decline from February’s levels. Manufacturing confidence is expected to drop from 50.7 to 42.5, while service sector confidence is set to drop from 49.4 to 41. These are diffusion indices, where values above 50 indicate expansion and values below 50 indicate contraction. Accordingly, future reports will be well worth monitoring, as they should give us more insight into how businesses respond to the spread of the coronavirus.

Also set for release on Tuesday, February’s new home sales report is expected to show sales declining by 1.8 percent during the month. Compared with existing home sales, the new home segment is smaller and subject to a lot of monthly volatility. We should also note that new home sales increased dramatically throughout 2019, and January’s result marked the fastest pace of sales since 2007. So, even if the estimates for February are accurate, this report would mark another example of the strength of the housing market.

On Wednesday, we’ll get the preliminary estimate of February’s durable goods orders report. Orders are expected to fall by 1 percent during the month. Core orders, which strip out the impact of volatile transportation orders, should decline by 0.4 percent. Core durable goods orders are often used as a proxy for business investment, so a drop in February would be a concern. Going forward, this sector should be monitored, as we can anticipate headwinds from the coronavirus crisis.

Friday will see the release of February’s personal income and personal spending reports. Both are expected to show steady growth, with income and spending set to increase by 0.4 percent and 0.3 percent, respectively. These numbers would represent solid results for the month, indicating that consumers were both willing and able to spend at the beginning of the year. Once again, we can reasonably expect the coronavirus to be a headwind for future results. Given the importance of consumer spending to the overall economy, it will be important to monitor these reports.

Finally, we’ll finish the week with Friday’s release of the second and final reading of the University of Michigan consumer sentiment survey for March. Sentiment is expected to decline from 95.5 midmonth to 93.3 at month-end. This result would mark a notable decline from the level of 101 the index hit in February, but it would leave the index above the three-year low of 89.8 recorded in August 2019. Improving consumer confidence typically supports faster consumer spending growth, so this anticipated decline is a concern. It’s not surprising, however, given recent economic developments. Market volatility, rising layoffs, and fears surrounding the spread of the coronavirus are all likely to weigh on consumers’ minds over the upcoming months, depressing confidence and spending levels.

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

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