Last week was jam-packed with economic updates and reports that covered a variety of sectors. The February retail sales report was one of the more widely monitored updates, as it showed that consumer spending continued to grow during the month. But the pace of sales growth slowed compared to the start of the year. This will be a relatively quiet week, with only one major update scheduled.
Last Week’s News
On Tuesday, the February Producer Price Index report was released. The report showed that producer prices increased 0.8 percent during the month, which was slightly lower than the 0.9 percent expected increase. On a year-over-year basis, producer prices rose 10 percent in February, which was in line with expectations. Core producer prices, which strip out the impact of volatile food and energy prices, increased by a more modest 0.2 percent during the month and 8.4 percent on a year-over-year basis. Producers have seen high levels of inflationary pressure in the past year, driven by rising material, transportation, and labor costs. As we saw with the February consumer inflation report, producers have started to pass along higher prices to consumers, which has contributed to the high levels of consumer inflation to start the year. The Fed is expected to focus on stabilizing prices in 2022 by tightening monetary policy.
On Wednesday, the February retail sales report was released. Retail sales increased 0.3 percent during the month, which was slightly below economists’ estimates for a 0.4 percent increase. January’s report was revised upward from an initial increase of 3.8 percent to 4.9 percent, so the modest miss for sales growth in February wasn’t a major concern. Despite continued sales growth, there are signs that rising gas costs have started to negatively impact spending in other sectors. Core retail sales, which strip out the impact of gas and auto sales, declined 0.4 percent against calls for a 0.4 percent increase. March’s retail sales report will provide economists with a better idea of the true impact of rising gas prices on overall spending, since gas prices surged during the month largely due to Russia’s invasion of Ukraine.
Wednesday also saw the release of the National Association of Home Builders Housing Market Index for March. This measure of home builder confidence fell by slightly more than expected during the month, dropping from 81 in February to 79 in March against calls to remain unchanged. This is a diffusion index where values above 50 indicate growth, so this result was a sign that home builders remained confident despite the decline. The housing sector has been one of the strongest areas of the economy throughout the pandemic, driven by high levels of home buyer demand and record-low mortgage rates. Looking forward, rising mortgage rates and low inventory of available houses for sale may serve to dissuade potential home buyers and slow overall sales growth; however, if home builder confidence remains near current levels, it would still be enough to support strong new home construction growth.
The final major release on Wednesday was the FOMC rate decision from the Fed’s March meeting. The Fed hiked the federal funds rate by 25 bps, which marked the first rate hike since the Fed cut interest rates to virtually zero at the start of the pandemic. This was a widely anticipated update and signaled the start of the Fed’s efforts to normalize interest rates following years of supportive policy. Eight of the nine voting members approved of the interest rate increase, with the lone dissenter calling for a more aggressive hike of 50 bps. The Fed is expected to continue to methodically increase rates during the year to tamp down on inflationary pressure. The Fed expects inflation to end the year well above its 2 percent target, which could lead to faster rate hikes and balance sheet reductions throughout the year. Markets are currently pricing in roughly six more rate hikes for 2022, which is in line with the median Fed projection that was released at this meeting.
On Thursday, the February housing starts and building permits reports were released. These measures of new home construction came in mixed during the month. Housing starts increased 6.8 percent in February, well above the 3.8 percent increase that was expected. Permits dropped 1.9 percent against calls for a 2.4 percent decline; they had previously hit their highest level since January 2006, so the modest decline in this often-volatile report was not a major concern. Instead, the focus was on housing starts, which hit their strongest pace since February 2006. Part of the surge in new home construction was due to the declining medical risks from the Omicron variant; however, high levels of home buyer demand and home builder confidence also supported the impressive increase in construction during the month. Given the lack of supply of existing homes for sale, this report was an encouraging sign that home builders continue to see strong demand for housing and are building and investing accordingly.
Thursday also saw the release of the February industrial production report. Production increased 0.5 percent during the month, which was down from the 1.4 percent increase we saw in January but in line with economists’ expectations. The solid result was powered by a 1.2 percent increase in manufacturing production, which was better than the expected 1 percent growth. This result represented the best month for manufacturing growth since October and signaled that the worst medical risks from the Omicron variant are likely behind us. Manufacturers have been trying to increase capacity and output during the past year to meet high levels of demand and complete the backlogs of orders from businesses and consumers. The accelerating manufacturing production growth in February could be a sign for faster growth in the months ahead, which, in turn, would be a good sign for the overall health of the economy to start the year.
We finished the week with Friday’s release of the February existing home sales report. Sales of existing homes, which account for the majority of home sales in the country, fell 7.2 percent following a 6.6 percent increase in January. The February decline was larger than economists’ estimates for a 6.2 percent drop in sales. The sales surge in January brought the pace of home sales to a one-year high, as prospective home buyers rushed to lock in relatively low mortgage rates at the start of the year. The pullback in February was largely due to a lack of homes for sale and rising prices, as well as higher mortgage rates negatively affecting affordability. The average 30-year mortgage rate increased from 3.78 percent at the end of January to 4.30 percent at the end of February. Looking ahead, rising mortgage rates and prices are expected to serve as headwinds for significantly higher levels of existing home sales in the short term.
What to Look Forward To
On Wednesday, the preliminary estimate for the February durable goods orders report is set to be released. Durable goods orders are expected to fall 0.5 percent following a 1.6 percent increase in January. This anticipated drop in orders is due to a decline in volatile aircraft orders during the month. Core durable goods orders, which strip out the impact of transportation orders, are set to increase 0.5 percent in February after rising 0.7 percent in January. If estimates hold, this would mark 12 consecutive months with core durable goods orders growth. Businesses have continued to spend and invest in order to try and meet high levels of consumer demand over the past year. So, continued core durable goods order growth in February would be an encouraging sign that business investment remains strong during the month.
That’s it for this week—thanks for reading!