Several important economic updates were released last week, with the ISM Service sector confidence report serving as a highlight. The report showed that service sector confidence rebounded in March following Omicron-related declines to start the year. This will be a busy week of updates, with a focus on March’s inflation reports as well as a look at retail sales, consumer confidence, and industrial production.
Last Week’s News
Tuesday saw the release of the international trade report for February. It showed that the trade deficit remained unchanged from a downwardly revised $89.2 billion in January against calls for a modest narrowing to $88.5 billion. This kept the monthly trade deficit at its largest point on record, driven by a 1.3 percent increase in imports. This increase was enough to offset a 1.8 percent increase in exports due to the larger absolute value of imports for the economy. The monthly trade deficit increased at the start of the pandemic, and the trade gap continued to widen in 2021 due to high levels of domestic demand and tangled global supply chains. Looking forward, supply chain disruptions may continue to negatively affect global trade, which could lead to high monthly trade deficits in the U.S. Given the record-high deficits to start the year, international trade is expected to serve as a headwind to overall economic growth in the first quarter.
On Tuesday, the ISM Services index for March was released. Service sector confidence improved during the month, increasing from 56.5 in February to 58.3 in March against calls for a larger increase to 58.5. This is a diffusion index where values above 50 indicate expansion, so March’s report is a sign of faster growth for the service sector. Service sector confidence was well supported throughout most of 2021, as diminishing health risks and pent-up consumer demand drove business confidence to record highs. That said, the Omicron wave at the end of the year and the start of 2022 negatively affected confidence levels, and the index has only now started to recover. Economic risks from the pandemic are expected to remain muted given the improvements we’ve made in vaccination rates and natural immunity from previous exposure, which could support a further rebound in business confidence in the months ahead.
On Wednesday, the FOMC meeting minutes from the Fed’s March meeting were released. The Fed increased the federal funds rate by 25 bps at this meeting, which was the first rate hike from the central bank since 2018. Given the shift in monetary policy at the March meeting and market expectations for further rate hikes throughout the year, the minutes from the meeting were widely anticipated. The release showed that Fed board members were concerned with the economy’s inflationary pressure and are determined to tighten monetary policy throughout the year to combat rising prices. While we’ve seen the central bank start to lift interest rates, it also discussed plans for reducing the size of the Fed’s balance sheet at some point this year. While there was no firm time frame set on balance sheet reductions at the March meeting, the minutes indicated that the Fed may be prepared to start reducing the size of its balance sheet at the next meeting in May.
What to Look Forward To
On Tuesday, the March Consumer Price Index reports are set to be released. Consumer prices are expected to increase 1.2 percent during the month, up from the 0.8 percent increase we saw in February. On a year-over-year basis, consumer prices are expected to increase 8.4 percent in March, up from 7.9 percent in February. Much of the anticipated acceleration in consumer inflation in March is due to rising gas and food prices, which, in turn, are partially due to the Russian invasion of Ukraine. Core consumer prices, which strip out the impact of volatile food and energy prices, are expected to increase 0.5 percent in March. This would be in line with the 0.5 percent increase we saw in February. On a year-over-year basis, core consumer prices are set to increase 6.6 percent in March, up slightly from the 6.4 percent increase in February. Sustained high levels of consumer inflation can erode purchasing power and negatively affect confidence and spending, so this will continue to be a widely monitored monthly report.
Wednesday will see the release of the Producer Price Index report for March. As was the case with consumer prices, producer prices are expected to increase at a faster rate in March, driven, in large part, by rising food and energy costs. Headline producer prices are expected to increase 1.2 percent during the month and 10.6 percent on a year-over-year basis. This is up from February’s 0.8 percent monthly and 10 percent annual increase in producer prices. Core producer prices, which strip out the impact of food and energy prices, are expected to increase 0.5 percent during the month and 8.4 percent on a year-over-year basis. Inflationary pressure has been high throughout the economy during the past year, driven by high levels of consumer demand, rising material costs, and tangled global supply chains. The Fed is expected to tighten monetary policy throughout the year to try and tame inflationary pressure.
On Thursday, the March retail sales report will be released. Retail sales are expected to increase 0.6 percent during the month, up from the 0.3 percent increase we saw in February. Core retail sales, which strip out the impact of volatile gas and auto sales, are expected to remain flat following a 0.4 percent decline in February. Headline consumer spending has held up well through the start of the year, as consumers were willing to go out and spend throughout the first quarter. That said, we may be seeing signs that rising gas, shelter, and food costs have started to crowd out other areas of spending. Looking forward, it will be important to monitor consumer spending reports for any signs of potential weakness, given that consumer spending accounts for the majority of economic activity in the country.
Thursday will also see the preliminary estimate of the University of Michigan consumer sentiment survey for April. Economists expect to see the index drop from 59.4 in March to 58.7 in April. If estimates hold, this would mark the lowest level for the index since 2011. Consumer sentiment has been challenged since last June, as rising inflationary pressure and shifting medical risks have weighed heavily on consumer sentiment. Recently, rising gas prices have caused further pain for consumers, which accounted for the large drop in sentiment we saw in March. Historically, higher levels of consumer sentiment have supported faster spending growth; however, consumer spending has remained relatively healthy over the past few months despite the notable drop in confidence. A rebound in confidence later in the year could support faster spending growth, but we’ll likely need to see progress in combating inflation before seeing a notable increase in sentiment.
We’ll finish the week with Friday’s release of the March industrial production report. Industrial production is set to increase 0.4 percent during the month following a 0.5 percent increase in February. Part of the anticipated increase in production in March is due to expectations for higher capacity utilization, which is set to increase from 77.6 percent in February to 77.8 percent in March. Manufacturing production is expected to increase 0.4 percent following a 1.2 percent increase in February. Industrial production slowed in December, as high levels of absenteeism due to the Omicron variant caused a temporary lull in production; however, the rebound in production has been encouraging. If estimates hold for March, the manufacturing industry may continue to show signs of healthy growth to start the year following the temporary disruption from the Omicron variant at the end of 2021.
That’s it for this week—thanks for reading!