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We saw the release of several important economic updates last week. The April retail sales report was a highlight and showed that sales growth came in strong during the month while March’s growth was revised upward. This will be another interesting week for updates, with reports on durable goods orders, the minutes from the most recent Fed meeting, and personal income and spending growth in April.
Last Week’s News
On Tuesday, the April retail sales report was released. Retail sales increased 0.9 percent during the month, which was slightly less than the expected 1 percent increase. Despite the modest miss against expectations in April, March’s retail sales growth was revised upward from 0.5 percent to 1.4 percent. Core retail sales, which strip out the impact of volatile auto and gas sales, increased 1 percent, which was better than the 0.7 percent increase that was expected. Core retail sales growth in March was also revised upward. This now marks four consecutive months with rising headline and core sales growth. This is especially impressive given the headwinds created by rising medical risks earlier in the year and the high levels of consumer inflation. Consumer spending drives the majority of economic activity in the country, so the continued strength in spending in April was a positive sign for overall growth to start the second quarter.
Tuesday also saw the release of the April industrial production report. Production increased 1.1 percent during the month, up from the 0.9 percent increase we saw in March and higher than economist forecasts for a 0.5 percent increase. This strong result was driven, in part, by increased manufacturing production. Manufacturing production rose 0.8 percent in April, which was better than the expected 0.4 percent increase. We’ve seen manufacturing production show solid signs of improvement in each of the past three months following an Omicron-driven lull in January. Capacity utilization, which is a measure of potential output that is being realized, hit a 15-year high in April, highlighting the impressive increase in manufacturing activity we’ve seen this year. Looking ahead, continued industrial and manufacturing production growth would be another signal that the economy continues to grow at a healthy pace despite the headwinds we currently face.
The third and final major data release on Tuesday was the National Association of Home Builders Housing Market Index for May. This measure of home builder confidence fell by more than expected, as the index dropped from 77 in April to 69 in May against calls for a more modest drop to 75. This result brought the index to its lowest level since April 2020, as rising material and labor costs weighed on home builder confidence during the month. Additionally, rising mortgage rates and housing prices led to a drop in prospective home buyer foot traffic. Despite the larger-than-expected decline for the index in May, this result still left home builder confidence in expansionary territory, as this is a diffusion index where values above 50 indicate growth. The housing sector has been one of the bright spots in the economic expansion since initial lockdowns expired in spring 2020; however, given the rising headwinds for housing this year, we may start to see a slowdown in activity for the sector.
On Wednesday, the April building permits and housing starts reports were released. Both of these measures of new home construction fell during the month. Permits dropped 3.2 percent against calls for a 3 percent decline, while starts dropped 0.2 percent against calls for a 2.1 percent decline. While these indicators can be quite volatile on a month-to-month basis, the pace of both starts and permits remains well above pre-pandemic levels and signals continued strong levels of new home construction in April despite the headwinds created by falling home builder confidence and rising material and labor costs. The backlog of single-family homes that are authorized for construction but not yet started increased to its highest level in 15 years in April, signaling continued capacity for builders in the months ahead. While we’ve started to see signs of a slowdown in the housing sector, it’s important to remember that slower growth is still growth and the slowdowns come following an extended period of strong growth.
We finished the week with Thursday’s release of the April existing home sales report. Sales of existing homes fell 2.4 percent during the month, which was slightly worse than the expected 2.3 percent decline. This now marks three straight months with declining existing home sales, driven by rising prices and mortgage rates. On an annualized basis, existing home sales came in at 5.61 million, which is largely in line with pre-pandemic sales levels. The supply of existing homes for sale remained low, and the inventory of homes for sale was down 10.4 percent on a year-over-year basis. Prices were up 14.8 percent over the same period, which served as a headwind for faster sales growth. Looking forward, high prices and rising mortgage rates are expected to temper future sales growth; however, if sales remain near current levels, it would still signal a healthy level of home buyer demand.
What to Look Forward To
Wednesday will see the release of the preliminary estimate for the April durable goods orders report. Economists have forecasted a 0.6 percent increase for durable goods orders during the month, down from the better-than-expected 1.1 percent increase in orders in April. Core durable goods orders, which strip out the impact of volatile transportation orders, are expected to grow 0.6 percent during the month following a 1.4 percent increase in March. If estimates hold, this would mark two consecutive months with increased business orders following an Omicron-induced drop in orders in February. Core durable goods orders are often viewed as a proxy for business investment, so continued growth in April would be a welcome sign that businesses continued to invest despite rising prices. Business spending has remained solid throughout the pandemic, as business owners have continued investing to try and meet high levels of buyer demand.
Wednesday will also see the release of the FOMC meeting minutes from the Fed’s most recent May meeting. The central bank hiked the federal funds rate 50 bps at this meeting and announced plans to reduce the size of its balance sheet going forward. While both actions were expected from markets and economists, these will still be widely monitored minutes as they should give a better idea of the discussions leading up to both decisions. Given the improvements we’ve seen in the labor market over the past two years and the high levels of consumer and producer inflation throughout the economy, the Fed is expected to spend the rest of 2022 and the start of 2023 tightening monetary policy in an attempt to tamp down rising prices. While the plans for tighter monetary policy are an encouraging sign that the Fed views the economy as healthy enough to withstand higher rates, tighter policy can put pressure on valuations and cause market turbulence. Therefore, any updates from the central bank will be worth monitoring throughout the year.
On Friday, the April personal income and personal spending reports are set to be released. Personal spending is set to increase 0.6 percent during the month following a 1.1 percent increase in March. If estimates prove to be accurate, this would mark four consecutive months with rising personal spending, echoing the similar improvements we’ve seen for retail sales so far this year. Personal income is also expected to show improvements, with economists calling for a 0.5 percent increase in personal income in April. Personal income growth was volatile early on during the pandemic, as shifting unemployment and federal stimulus payments caused large monthly swings in income growth. We’ve seen growth stabilize since last fall, and continued income growth in April would mark seven straight months with improved personal income. Looking forward, the tight labor market is expected to support further income growth, which, in turn, may support future spending.
That’s it for this week—thanks for reading!
