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Last week was packed with economic updates, with reports largely coming in mixed. Better-than-expected results for retail sales and consumer confidence were offset by rising initial unemployment claims and a disappointing decline in industrial production. This week’s news will largely focus on housing, with updates scheduled on home builder confidence, new home construction, and existing home sales.
Last Week’s News
On Tuesday, September’s Consumer Price Index was released. Consumer prices rose by 0.2 percent during the month, which was in line with economist expectations and down from a 0.4 percent increase in August. On a year-over-year basis, consumer inflation rose by 1.4 percent, as expected. Core consumer prices, which strip out the impact of volatile food and energy prices, went up by the forecasted 0.2 percent during the month and 1.7 percent year-over-year. The lockdowns created deflationary pressure earlier in the year, but reopening efforts led to an uptick in inflationary pressure throughout the summer. Still, despite the tailwind created by increased consumer demand during the summer, overall prices remain constrained. The slowdown in September’s consumer inflation indicates that the tailwind created by reopening efforts is starting to fade.
Wednesday saw the release of the Producer Price Index for September. Unlike consumer prices, producer prices increased by more than expected during the month, albeit from a slower base pace than that of consumer inflation. Producer prices rose by 0.4 percent in September, against calls for a 0.2 percent increase. This result brought the year-over-year rate of producer inflation to 0.4 percent, marking the first time that producer prices have shown growth on this basis since March. Core producer inflation, which strips out food and energy prices, also rose by more than expected, up 0.4 percent for the month and 1.2 percent for the year, against forecasts for 0.2 and 1.0 percent growth, respectively. Despite the moderate pickup in inflation we’ve seen since reopening efforts kicked off, inflation still remains well below the Fed’s stated 2 percent target. The central bank is not expected to react to rising inflation by raising rates until and unless the job market improves considerably.
On Thursday, the weekly initial jobless claims report for the week ending October 10 was released. The report showed that an additional 898,000 Americans filed for initial unemployment claims during the week, rising from an upwardly revised 845,000 the week before and above economist estimates for 825,000 initial claims. The report brought the pace of initial claims to its highest weekly level since August. Continuing unemployment claims, which are reported with a one-week lag to initial claims, fell from 11.183 million to 10.018 million, but this decline was partially driven by recipients exhausting their state unemployment benefits. The emergency federal program that provides an additional 13 weeks of benefits saw 818,000 Americans move to this longer-term jobless aid during the week. This switch, combined with the continued high pace of layoffs months after reopening efforts began, shows the continued pressure faced by the labor market.
On Friday, the September retail sales report was released. Sales impressed during the month, rising by 1.9 percent against calls for a more modest 0.8 percent increase. This result marks the best month of sales since June and signals that consumers were willing and able to continue spending despite lowered government stimulus during the month. Five straight months with retail sales growth have now been recorded, which has taken the overall pace of sales above pre-pandemic levels. Core retail sales, which strip out the impact of volatile auto and gas sales, also impressed, with a 1.5 percent increase during the month against calls for a 0.5 percent rise. The gains were widespread, with traditional back-to-school categories and recreational goods showing notable strength in September after disappointing slightly in August. Overall, given the importance of consumer spending on the overall economy, this strong report bodes well for third-quarter economic growth.
Friday also saw the release of September’s industrial production report. Production disappointed during the month, declining by 0.6 percent against forecasts for a 0.5 percent increase. Part of the decline can be blamed on lowered utility output driven by temperatures returning to more normal seasonal levels following a warmer-than-usual summer, but weak manufacturing output also contributed. Manufacturing production fell by 0.3 percent in September against calls for a 0.6 percent increase, although August’s report was upwardly revised to show a 1.2 percent rise. Manufacturing output remains more than 6 percent below pre-pandemic levels, highlighting the diverging economic recoveries we’ve seen for producers and consumers since lockdowns ended. Looking forward, we can hope that low inventory levels, continued consumer demand, and high manufacturer confidence will drive additional production growth. Still, the September report shows that a lot of work must be done to reach pre-pandemic levels.
We finished the week with Friday’s release of the preliminary estimate for the University of Michigan consumer sentiment survey for October. This widely followed measure of consumer confidence rose by more than expected, from 80.4 in September to 81.2 in October, against calls for an increase to 80.5. Following the index’s rise to a post-lockdown high in September, this result is another step in the right direction. Increased consumer confidence typically leads to faster consumer spending growth, so this release bodes well for October’s consumer spending reports. But, even with confidence at a seven-month high, it’s important to note that the index still sits well below its recent high of 101 in February. This fact highlights the very real work that needs to be done to get consumer sentiment back to pre-pandemic levels.
What to Look Forward To
We started the week with Monday’s release of the National Association of Home Builders Housing Market Index for October. This measure of home builder confidence increased by more than expected during the month, rising from 83 in September to 85 in October, against calls to remain unchanged during the month. This gain brought the index to a new record high, breaking the previous high set in September. Home builder confidence has rebounded notably since reopening efforts took hold, aided by record low mortgage rates that have driven additional prospective home buyers into the market. Confidence was further supported by falling timber prices during the month. Previously, the pace of new home sales hit its highest level in 14 years in August. Historically, higher levels of home builder confidence have supported faster building of new homes, so this report bodes well for October’s new home construction reports.
Speaking of new home construction, on Tuesday, the September building permits and housing starts reports are set to be released. Both measures are expected to show growth during the month, with permits and starts slated to increase by 3.2 percent and 2.4 percent, respectively. As noted above, home builder confidence set an all-time high in September, which helps explain the anticipated increases in new home construction. Furthermore, lumber prices have dropped considerably compared with prices earlier in the summer, which should serve as an additional tailwind for new construction. Driven by rising home builder confidence, falling mortgage rates, and limited supply, both building permits and housing starts have improved markedly since hitting a pandemic-induced low in April.
Thursday will see the release of the weekly initial jobless claims report for the week ending October 17. Economists expect to see an additional 848,000 initial claims filed during the week, a result down from the 898,000 claims filed the previous week but still very high on a historical basis. If estimates hold, this report would mark seven straight weeks in which initial claims have hovered around 850,000 per week, which is roughly four times the average we saw in 2019. Continuing unemployment claims are also expected to decline, but, as mentioned above, some of the anticipated decline can be attributed to claimants exhausting their state benefits and going on federal emergency pandemic aid rather than returning to the workforce. Given the continued stress on the labor market, this weekly update will continue to be widely followed.
We’ll finish the week with Thursday’s release of the September existing home sales report. Existing home sales are expected to rise by 3 percent during the month, following a 2.4 percent increase in August. The pace of existing home sales has already surpassed pre-pandemic levels, and, if the estimate holds, would be up more than 14 percent compared with last September. September would mark the best month for existing home sales since December 2006, highlighting the impressive rebound we’ve seen in the housing sector over the past few months. Looking forward, the low level of available inventory may start to serve as a headwind for existing home sales, as the supply of existing homes for sale was down 18.6 percent on a year-over-year basis in August.
That’s it for this week—thanks for reading and stay safe!
