Last week saw a number of important data releases, with the much-better-than-expected January retail sales report and strong industrial production report serving as highlights. This will be another busy week for updates, with a focus on consumer confidence, durable goods orders, and the January personal income and spending reports.
Last Week’s News
On Wednesday, the January Producer Price Index was released. Producer prices rose by more than expected, increasing by 1.3 percent during the month against calls for a 0.4 percent increase. The rise in prices was widespread. Core consumer prices, which strip out the impact of volatile food and energy prices, also came in above expectations for the month, going up by 1.2 percent against forecasts for a 0.2 percent increase. Despite these results, year-over-year producer inflation remains constrained, as headline producer prices rose by 1.7 percent on an annual basis in January. Year-over-year producer inflation remains below the pre-pandemic high of 2 percent we saw in January 2020. The Fed has indicated it is willing to let inflation figures come in above its 2 percent target for some time if the weakness in the labor market continues. So, for now, inflation remains under control.
Wednesday also saw the release of the January retail sales report. Retail sales blew past expectations, rising by 5.3 percent during the month against calls for a modest 1.1 percent increase. This positive result, which marked the best month of sales growth since June 2020, followed three months of declining sales. The increase in sales was widespread. Core retail sales, which strip out the impact of volatile auto and gas sales, rose by 6.1 percent during the month against forecasts for a 0.8 percent increase. The strong results were driven by another round of stimulus checks hitting American bank accounts, as well as loosened state and local restrictions that allowed folks to shop and eat out. Last year, we saw similar surges in activity in May and June after the initial lockdowns were lifted. All in all, this report was very encouraging. It could be an indication that pent-up consumer demand will be able to continue to power spending growth over the upcoming months as we try to get back to more normal economic conditions. Consumer spending accounts for the majority of economic activity in the country, so this report was a good sign for overall growth to start 2021.
Wednesday’s third major release was the release of the National Association of Home Builders Housing Market Index for February. This widely followed gauge of home builder confidence rose from 83 in January to 84 in February, against forecasts for no change. Home builders cited continued low mortgage rates that spurred additional prospective home buyer foot traffic as a primary reason for the increase in confidence. Since the index hit a pandemic-induced low of 30 in April 2020, home builder confidence has rebounded notably and the index remains well above the pre-pandemic high of 76 recorded in December 2019. Looking forward, home builders see rising construction costs as a headwind for significantly faster growth. For the time being, however, the low mortgage rates and high levels of home buyer demand continue to support healthy levels of home builder confidence and new home construction.
Wednesday also saw the releasee of the January industrial production report. Industrial production rose by 0.9 percent during the month, above economist estimates for 0.4 percent growth. This report marks four straight months of industrial production growth, driven in part by improved levels of manufacturing output. Manufacturing output grew by 1 percent during the month, against calls for a more modest 0.7 percent increase. While the producer recovery has been slower than the consumer recovery over the past year, this report showed that manufacturing capacity has almost made it back to pre-pandemic levels. In fact, overall manufacturing output now sits at just 1 percent below pre-pandemic levels. Overall, these better-than-expected results signal that the manufacturing recovery we saw throughout the second half of 2020 continued into the new year. Businesses have continued to adapt successfully to operating during the pandemic.
Wednesday’s final major data release was the release of the FOMC minutes from the Fed’s January meeting. There were no major changes to monetary policy during the meeting, and no revelations contained within the minutes. The Fed remains committed to supportive monetary policy throughout the crisis and during the economic recovery. In addition, for the foreseeable future, no plans exist for any changes to the federal funds rate. Looking forward, the major point of focus will be any potential signals from the Fed about any plans for scaling back its asset purchase programs. In 2013, the Fed faced difficulties when it tried to pull back on its quantitative easing policies. So, to avoid another taper tantrum scenario, the central bank will likely be cautious about announcing a slowdown in its purchase programs.
On Thursday, the January building permits and housing starts reports were released. These measures of new home construction came in mixed for the month. Housing starts fell by 6 percent, while permits rose by 10.4 percent. The forecast by economists was for a more modest 0.5 percent decline for starts and a 1.4 percent drop for permits. Permits now sit at their highest level since 2006. Housing starts, after rising for five straight months, are in line with pre-pandemic levels. The January slowdown in housing starts was primarily due to a drop in single-family housing starts. This outcome is understandable given the fact that single-family housing starts hit a 14-year high in December 2020. Looking forward, rising construction costs will likely serve as a headwind for significantly faster new home construction growth. Still, activity near current levels would signal a healthy housing sector.
Thursday also saw the release of the initial jobless claims report for the week ending February 13. The report showed that 861,000 Americans filed for initial unemployment claims during the week. This number was up from the 848,000 initial claims filed the week before and above economist estimates for a drop to 773,000. Disappointingly, this result brought the level of weekly initial claims to a four-week high. Continuing unemployment claims, which are reported with a one-week lag to initial claims, also came in above forecasts. They fell from 4.558 million to 4.494 million, against calls for a decline to 4.425 million. These results highlight the continued stress on the labor market created by the pandemic, despite the progress we’ve recently seen in lowering case counts and lifting state and local restrictions. Many areas of the economy have been able to get back to or above pre-pandemic levels, but the job market’s recovery has been slower and still faces very real headwinds.
We finished the week with Friday’s release of the January existing home sales report. To start the year, existing home sales beat expectations, rising by 0.6 percent during the month against calls for a 2.4 percent decline. This positive result brought the pace of existing home sales to its second-highest level since 2006, highlighting the impressive rebound in housing demand we’ve seen since initial lockdowns were lifted last year. On a year-over-year basis, existing home sales were up by 23.6 percent in January, further emphasizing the strength of the housing sector. Looking forward, the major anticipated headwind for faster sales growth is the low level of supply of existing homes for sale. In January, the number of homes available for sale was down by 25.7 percent compared with a year ago, indicating a very tight market with limited available supply. Unsurprisingly, given the low supply and high demand, prices have increased notably over the past year. As such, cost is expected to serve as another headwind for significantly faster sales growth. With that being said, sales near current levels are still a sign of a strong housing market.
What to Look Forward To
On Tuesday, the Conference Board Consumer Confidence Index for February will be released. This widely followed measure of consumer confidence is expected to increase modestly from 89.3 in January to 90 in February. If estimates prove accurate, this release would mark two straight months with improving confidence, after rising case counts and political uncertainty caused the index to decline in November and December 2020. The drop in confidence due to the third wave of the pandemic brought the index near the initial lockdown-induced low of 85.7 it hit in April 2020, so any further improvement in February would be welcome. There is hope that increased federal stimulus and more control over the pandemic will lead to a swift rebound in consumer confidence and spending this year. For the time being, however, consumer confidence at current levels indicates that work is needed to get back to more normal economic conditions.
On Wednesday, the January new home sales report is set to be released. New home sales are forecasted to rise by 2 percent during the month, following a 1.6 percent increase in December. New home sales are a smaller and often more volatile portion of the market compared with existing home sales. Once initial lockdowns were lifted last year, new home sales have rebounded sharply and remained well above pre-pandemic levels since June 2020. Looking forward, as was the case with existing home sales, tight supply is expected to serve as a headwind for significantly faster levels of sales growth. If estimates prove accurate, the January report would be another sign that the housing market carried the strong momentum from 2020 into the new year.
On Thursday, the initial jobless claims report for the week ending February 20 will be released. Economists expect to see the number of initial claims fall from 861,000 to 750,000. If estimates hold, this report would bring the pace of weekly unemployment claims to its lowest level since the start of December 2020. The number of weekly initial claims would be close to the post-lockdown low of 711,000 we saw in the first week of November 2020. While any decline in weekly unemployment claims would be a positive signal, the disappointing results so far this month indicate that we might be in for a potentially weak February jobs report. Given the relatively slower pace of recovery for the job market over the past year, the Fed is expected to continue to keep monetary policy supportive until we see significant progress in getting folks back to work.
Thursday will also see the release of the preliminary estimate of the January durable goods orders report. Durable goods orders are expected to rise by 1.2 percent during the month, following a 0.5 percent increase in December. Unlike consumer confidence, producer confidence remained resilient throughout the third wave of the pandemic, and durable goods orders showed continued growth throughout the second half of the year. If estimates hold, this report would be a positive sign that business spending continued into the start of the new year. Core durable goods orders, which strip out the impact of volatile transportation orders, are expected to grow by 0.7 percent in January. Core durable goods orders are often viewed as a proxy for business investment, so continued growth for this segment would be another positive sign for overall business activity in January.
On Friday, the January personal income and personal spending reports are set to be released. Personal spending is expected to rise by 0.7 percent during the month, following a 0.2 percent decline in December. Accurate estimates would signal a welcome return to spending growth following two months of declines, echoing the increase in retail sales we saw during the month. Throughout the pandemic, personal income has been very volatile on a month-to-month basis, driven by shifting federal stimulus and unemployment payments. Economists have forecasted a 10 percent increase in personal income in January, due to the additional federal stimulus checks and enhanced unemployment insurance announced at the end of December. If the estimate holds, the income increase would be similar to the 12.4 percent surge in income in April 2020, when the initial round of stimulus checks hit American bank accounts.
We’ll finish the week with Friday’s second and final release of the University of Michigan consumer sentiment survey for February. The preliminary report released earlier in the month showed a surprise decline in sentiment, with the index falling from 79 in January to 76.2 to start February. Economists do not expect to see any changes to the index in the final report. The decline earlier in the month was primarily driven by a sharp drop in consumer expectations, as the expectations index hit a six-month low in February. The initial report continued to show a partisan divide in responses. Independent and Republican respondents had lowered confidence to start the month, while Democrats saw confidence improve. Given the political nature of the responses, it’s unlikely that the drop in sentiment will have a material impact on consumer spending data during the month. Nonetheless, this survey will continue to be widely monitored, given the historical relationship between improving confidence and faster consumer spending growth.
That’s it for this week—thanks for reading and stay safe!