Monday Update: Retail Sales Jump for Second Month in a Row

Posted by Sam Millette

This entry was posted on Jul 20, 2020 12:22:47 PM

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In his Monday Update, Commonwealth’s Sam Millette highlights the recovery of industrial production and retail sales.Last week was jam-packed with economic updates, highlighted by better-than-expected industrial production and retail sales reports showing a continuing recovery as reopening efforts took hold in June. This week, the economic update front will be relatively quiet, with a focus on home sales and the weekly initial jobless claims report.

Last week’s news

On Tuesday, the Consumer Price Index for June was released. Headline consumer inflation increased by 0.6 percent for the month, slightly above estimates for a 0.5 percent increase. This result brought year-over-year consumer inflation up to 0.6 percent. Core consumer prices, which strip out the impact of volatile food and energy prices, rose by a more modest 0.2 percent, bringing the pace of this segment’s year-over-year inflation to 1.2 percent. Although the pandemic served as a headwind for inflationary pressures throughout the past few months, consumer spending continued to pick up in June and economists expect this increased activity to spur inflationary pressure. Despite the increase in headline and core inflation, consumer inflation remains well below the Fed’s stated 2 percent target and is not expected to be a major concern for the central bank in the short term.

Wednesday saw the release of the June industrial production report. Production increased by more than expected during the month, rising 5.4 percent compared with economist estimates for 4.3 percent growth. This result was largely driven by a surge in manufacturing output, which rose 7.2 percent during the month against calls for a 5.7 percent increase. Continued reopening efforts in June were a major tailwind for production, especially in the auto sector, although many factories didn’t reopen until late in May. The June report indicates that manufacturers benefited from reopening efforts and had higher levels of business investment during the quarter than anticipated. Production remains more than 10 percent below February’s levels, so work remains to be done here, but the higher-than-expected production is another sign of recovery in May and June.

On Thursday, the weekly initial jobless claims report for the week ending July 11 was released. Initial claims fell modestly to 1.3 million from a downwardly revised 1.31 million the week before. This result did not meet economist estimates for a decline to 1.25 million initial claims, and it marks the smallest weekly drop in this indicator since the pandemic began. On a more encouraging note, continuing unemployment claims, which are reported with a one-week lag, fell from a downwardly revised 17.76 million to 17.338 million. Ultimately, this report shows that the labor market still faces pressure due to the pandemic. The streak of 15 straight weeks with declining initial weekly claims may end soon if rising case counts continue to serve as a headwind for further improvements to the job market.

Thursday also saw the release of June’s retail sales report. Retail sales grew by 7.5 percent during the month, beating economist estimates for 5 percent growth. Notably, May’s record gain of 17.7 percent was revised up to 18.2 percent. Core retail sales, which strip out the impact of volatile auto and gas sales, also beat expectations, increasing by 6.7 percent against calls for 5 percent growth. May’s very strong rebound in sales was bolstered by reopening efforts across the country, which also served as a tailwind in June. Consumer spending accounts for roughly two-thirds of overall economic activity, so the continued rebound in sales is a good sign for the ongoing economic recovery despite rising coronavirus case counts. The outlook for July’s sales picture is a bit clouded given the increased case counts and falling confidence we’ve seen so far this month. Nonetheless, the results in May and June indicate that the pace of the economic recovery has been faster than anticipated.

The third major data release on Thursday was the release of the National Association of Home Builders Housing Market Index for July. This measure of home builder confidence increased from 58 in June to 72 in July, against expectations for a more modest increase to 61. This rebound is very strong, considering the index hit a seven-year low of 30 in April, as lockdowns forced prospective home buyers to press pause on purchases. Home builders cited strong sales and continued improvement in prospective home buyer foot traffic as the major factors leading to the July result. Ultimately, higher levels of home builder confidence help support faster new home construction, so the swift recovery of this index is a good sign for future home construction and the overall housing market.

Speaking of new home construction, Friday saw the release of June’s building permits and housing starts reports, which both came in below expectations. Permits increased by 2.1 percent during the month, against calls for a 6.3 percent increase. Housing starts increased by 17.3 percent, against estimates for 22.2 percent growth. Despite not meeting the forecasts, both housing starts and building permits sit well above the low points set in April. The rise in housing starts is a good sign for the overall housing market, as supply remains constrained in some regions. Still, despite the partial recovery we’ve seen in home building activity since reopening efforts began, getting back to pre-pandemic activity levels will take time, as evidenced by these two reports.

Finally, we finished the week with Friday’s release of the preliminary estimate of the University of Michigan consumer sentiment survey for July. This widely followed measure of consumer confidence unexpectedly fell from 78.1 in June to 73.2 in July, against calls for a modest increase to 79. Despite the continued market rally and the better-than-expected jobs report for June, rising coronavirus case counts have led to falling consumer confidence, with the subindices for both the current situation and future expectations declining. The July survey is concerning, as declining consumer confidence is a headwind for future consumer spending growth. With this disappointing release, the index now sits well below the recent high of 101 set in February. Although confidence underwent an initial rebound in May and June as reopening efforts began, this report indicates that the continued spread of the coronavirus will likely serve as a headwind for the economic recovery until more progress is made combatting localized outbreaks.  

What to look forward to

On Wednesday, June’s existing home sales report is set to be released. Existing home sales are expected to increase by 22.8 percent during the month, after falling by 9.7 percent in May to hit their lowest level since 2010. So, a rebound here, while welcome, would still leave the pace of existing home sales far below recent highs. In fact, if estimates hold, existing home sales would be down more than 9 percent on a year-over-year basis. This sector staged an impressive rally throughout 2019 and the start of 2020, as low mortgage rates and high consumer confidence drove growth throughout the year. Given the negative impact created by the pandemic, it’s not surprising that existing home sales cratered in April, but, even accounting for a potential rebound in June, work must be done to get back to pre-pandemic levels.

On Thursday, the weekly initial jobless claims report for the week ending July 18 will be released. Economists expect to see a modest decline in initial claims, from 1.3 million to 1.28 million. The rising case counts we’ve seen throughout July are expected to serve as a headwind for further improvements for the job market, with many states either halting or, in some cases, rolling back reopening efforts to control localized outbreaks. While these efforts are likely prudent from a public health perspective, they are expected to moderate the pace of the economic recovery. As both initial and continuing unemployment claims remain high compared to historical norms, we’ll continue to monitor these weekly releases until the numbers return to more normal levels.  

We’ll finish the week with Friday’s release of June’s new home sales report. New home sales are expected to increase by 3.6 percent during the month, following a surprising 16.6 percent jump in May. This segment is a smaller and often more volatile portion of total home sales compared with existing homes, as we saw in May. If estimates hold, the pace of new home sales would be brought above levels last seen in November 2019, highlighting a very swift recovery since reopening efforts kicked off in May. Given increased home builder confidence in July, driven by a rise in home buyer foot traffic, the anticipated increase in new home sales makes sense. It would be a welcome sign for the health of the overall housing market.

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

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