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Last week was relatively busy on the economic update front, with a focus on inflation, retail sales, and consumer confidence. The reports came in mixed, with better-than-expected results for consumer confidence and jobless claims offsetting disappointing retail sales data and faster-than-anticipated inflation in July. This week will be relatively quiet for economic updates, with releases focusing on the housing sector and the minutes from the Fed’s most recent meeting.
Last week’s news
On Tuesday, July’s Producer Price Index report was released. This measure of producer inflation came in above expectations during the month, rising by 0.6 percent against forecasts for a 0.3 percent increase. This brought producer prices down 0.4 percent on a year-over-year basis. Core producer inflation, which strips out the impact of volatile food and energy prices, also rose above expectations, increasing by 0.5 percent against forecasts for a modest 0.1 percent increase. Despite the stronger-than-expected results, the deflationary pressure created by anti-coronavirus measures earlier in the year continues to keep inflation muted on a year-over-year level.
Wednesday saw the release of the Consumer Price Index for July. As was the case with producer prices, consumer inflation increased by more than expected during the month, going up 0.6 percent against forecasts for a 0.3 percent increase. This brought year-over-year consumer inflation up to 1 percent, rising from 0.6 percent in June. Core consumer inflation, which strips out the impact of food and energy prices, also increased by 0.6 percent during the month, against calls for a 0.2 percent rise. This result marked the largest monthly increase for core consumer prices since 1991, but, as with producer prices, the declines earlier in the year helped constrain inflation on a year-over-year basis. Given the continued stress on the labor market, the Fed is not expected to react to rising inflation by raising rates unless the employment picture improves considerably.
On Thursday, the weekly initial jobless claims report for the week ending August 8 was released. This measure of initial unemployment claims declined during the week, from 1.191 million initial claims the week before down to 963,000 claims. Economist estimates had been for a more modest decrease to 1.1 million initial filers. Marking the second week in a row in which initial claims have declined by more than expected, this encouraging update indicates that the headwinds for the labor market created by rising case counts in July moderated in August. Continuing unemployment claims, which are released with a one-week lag, also improved by more than expected during the week. Still, while these results were certainly welcome, claims remain high on a historical level, and a lot of work must be done to get back to pre-pandemic employment levels.
On Friday, July’s retail sales report was released. Sales disappointed during the month, with headline retail sales increasing by 1.2 percent against expectations for a 2.1 percent increase. This result is notably lower than the upwardly revised 8.4 percent jump we saw in June. Core retail sales, which exclude the impact of volatile auto and gas sales, increased by 1.5 percent against expectations for 1 percent growth. In June, core sales had risen by 7.7 percent. Despite the slowdown in sales growth compared with May and June, this report was moderately encouraging, given the drop in both major measures of consumer confidence during the month. These measures typically serve as a headwind for retail sales. Looking forward, hope exists that an improving public health situation in August could lead to higher levels of consumer confidence and sales growth. But we’ll have to wait for next month’s report to see if the sales slowdown in July was a one-off event or the start of a trend.
Friday also saw the release of July’s industrial production report. Production rose by a solid 3 percent during the month, following a 5.4 percent increase in June. This result was in line with economic expectations. The increased production was supported by a 3.4 percent increase in manufacturing output during the month, which came in above economist expectations for 3 percent growth. This growth was primarily driven by a 28.3 percent increase in motor vehicle and parts output during the month. Industrial production and manufacturing output were boosted in May and June by factory reopening efforts across the country, and it’s encouraging that production continued to grow in July given the rising COVID-19 case counts. Despite the rebound in production we’ve seen since reopening efforts began, production still remains below pre-pandemic levels, highlighting the likelihood of a long road back to full recovery for this economic sector.
Finally, we finished the week with the preliminary estimate of the University of Michigan consumer sentiment survey for August. This measure of consumer confidence increased modestly to start the month, from 72.5 in July to 72.8 in August, against calls for a decline to 72. This result helped the index stay away from the recent low of 71.8 it hit in April. Rising case counts and slowing reopening efforts caused consumer confidence to decline in July, but progress in containing local outbreaks helped bolster consumer sentiment. This report shows we can reasonably expect to see further improvements on this confidence front as long as the public health picture keeps improving. Typically, higher levels of consumer confidence support faster consumer spending growth, so this encouraging report should boost consumer spending in August.
What to look forward to
We started the week with Monday’s release of the National Association of Home Builders Housing Market Index for August. This measure of home builder confidence increased by more than expected during the month, rising from 72 in July to 78 in August, against calls for a more modest increase to 74. This result marks the second straight month in which home builder confidence came in above expectations, as the index previously jumped from 58 in June to 72 in July. This better-than-anticipated result in August brought the index to a record high it last hit in 1998. Home builder confidence has been boosted by record low mortgage rates that have been driving additional prospective home buyers into the market since reopening efforts started in May. The swift rebound we’ve seen in home builder confidence following the seven-year low of 30 the index hit in April is very impressive and has supported a rebound in new home construction.
Speaking of new home construction, Tuesday will see the release of July’s building permits and housing starts reports. Both permits and starts are expected to show continued growth during the month, with permits and starts slated to rise by 5.9 percent and 3.7 percent, respectively. If the estimates hold, they would bring the pace of new home construction to levels last seen in the first half of 2019. Still, even with the anticipated increases for both permits and starts during the month, the pace of new home construction would be down nearly 24 percent from the recent high set in February. So, the results for July are likely to highlight the long road back to pre-pandemic construction levels.
On Wednesday, the Fed will release the FOMC minutes from its July meeting. The Fed did not change policy at this meeting, voting unanimously to keep the federal funds rate at virtually zero. These minutes are expected to provide more insight into how Fed members viewed rising case counts in July, as the meeting took place while counts were rising notably in several states. Several members have noted that one of the major risks to their economic outlook is the uncertainty created by the pandemic, so it will be interesting to see how the Fed reacted to the worsening public health picture in July. The minutes could also contain hints regarding the types of additional stimulus that Fed members prefer if further economic support is needed. Increased asset buying and forward guidance are two of the potential solutions expected to have been considered.
On Thursday, the weekly initial jobless claims report for the week ending August 15 is set to be released. Economist expect to see 990,000 initial unemployment claims during the week, which would be a modest increase from the 963,000 made the week before. This report will be an important test for the labor market, as a better-than-expected result here would be further evidence that the headwinds created by rising cases in July are dissipating in August. But, even if the report beats expectations, initial claims will likely remain well above historical norms, highlighting the possibility of a long road ahead before employment numbers return to pre-pandemic levels. We’ll continue to monitor this important weekly release until unemployment claims are closer to historically average levels.
We’ll finish the week with Friday’s release of July’s existing homes sales report. Existing home sales are expected to increase by 14.4 percent during the month, following a strong 20.7 percent rise in June. If estimates hold, they would bring the pace of existing home sales to virtually the same level we saw in July 2019, highlighting this sector’s swift rebound following reopening efforts. Record lows in mortgage rates have been the major driver of rising housing sales. Rates continued to fall in July, so they should be a tailwind for further growth in housing sales. Nonetheless, despite the improvement we’ve seen and the anticipated increase in July, if estimates prove accurate, existing home sales would be down more than 17 percent compared with February’s recent high. This report will likely highlight the work that needs to be done in this sector.
That’s it for this week—thanks for reading and stay safe!
