Last week saw a number of important economic updates, with a focus on March’s service sector confidence and producer inflation reports. Service sector confidence served as a highlight during the week, with the better-than-expected March report bringing the index to its highest level on record. This will be another busy week for updates, with a focus on March’s consumer inflation and retail sales reports and a look into consumer and home builder sentiment in April.
Last Week’s News
On Monday, the ISM Services index for March was released. The report showed that service sector confidence surged well past economist expectations during the month. The index rose from 55.3 in February to 63.7 in March, against calls for a more modest increase to 59. This result brought the index to its highest level since records began back in 1997. This swift rebound for the index following a weather-related slump in February is an encouraging signal that the reduced restrictions at the state and local levels helped to spur a surge in business confidence as we head into the spring. The rise in confidence was supported by a strong increase in new orders for the service sector, highlighting strong levels of buyer demand. This is a diffusion index, where value above 50 indicate expansion, so this strong result is a good sign for business spending to finish out the quarter. Given the continued progress on the mass vaccination front and the anticipated tailwind from the most recent federal stimulus bill, business confidence and spending are expected to remain in healthy expansionary territory over the upcoming months.
On Wednesday, the February international trade report was released. The trade deficit widened by more than expected during the month, increasing from $67.8 billion in January to $71.1 billion in February. Economist estimates had been for the report to show a $70.5 billion deficit. The February report brought the monthly trade deficit to its largest level on record, as severe winter weather disrupted trade during the month. Imports fell by 0.7 percent during in February, but this decline was not enough to offset a 2.6 percent drop in exports during the month. Looking forward, economists expect to see a return to import and export growth in March, which should help to reverse some of the widening of the trade deficit. Given the relative strength in imports compared with exports so far this year, international trade is expected to serve as a modest headwind for first-quarter economic growth. Nonetheless, improving global economic conditions are expected to support faster levels of export growth throughout much of the rest of the year.
Wednesday also saw the release of the FOMC minutes from the Fed’s most recent March meeting. The Fed lowered the federal funds rate to virtually zero in March 2020, and there were no major changes to interest rates at this meeting, as expected. The minutes largely served to confirm the Fed’s recent messaging that supportive monetary policy will stay in place until substantial progress is made in the ongoing labor market recovery. The minutes showed that many participants believe some time is needed before enough progress in made to justify a tightening of policy. The majority of Fed members do not anticipate an increase in interest rates until at least 2023, which is consistent with the central bank’s previous forecasts. Additionally, the minutes showed that the Fed plans to continue the current $120 billion in monthly asset purchases for the foreseeable future. Participants did note, however, that going forward any guidance surrounding potential changes to the asset purchase program must be clearly communicated. Ultimately, there were no major surprises contained in these minutes. The Fed continues to remain dovish in order to support the ongoing economic recovery.
On Thursday, the initial jobless claims report for the week ending April 3 was released. The number of initial weekly unemployment claims increased unexpectedly from 728,000 to 744,000, against economist estimates for a decline to 680,000. Initial claims have been volatile on a week-to-week basis, but this report marks two consecutive weeks with increased initial claims. Previously, we saw the number of initial claims set a new post-lockdown low in mid-March. Currently, the four-week moving average for initial claims remains near the recent low of 721,000 claims per week, but the average did tick up slightly with this higher-than-expected result. Although notable progress has been made in getting weekly initial claims down from recent highs recorded during the third wave of infections, much work must be done to return claims to pre-pandemic levels. As this report showed, the labor market is still under pressure. Accordingly, this report will continue to be widely monitored, despite the improvements seen so far this year.
On Friday, the March Producer Price Index was released. Producer prices increased by more than expected during the month, rising by 1 percent against forecasts for a more modest 0.5 percent increase in March. This result translated to year-over-year producer inflation of 4.2 percent, above economist estimates for 3.8 percent year-over-year growth. Core producer prices, which strip out the impact of volatile food and energy prices, rose by a more modest 0.7 percent during the month and 3.1 percent on a year-over-year basis. Core producer inflation came in above economist estimates for a 0.2 percent increase during the month and 2.7 percent growth year-over-year. Part of the large year-over-year increase for headline and core producer prices is due to the comparison with the prices recorded in March 2020, when initial lockdowns caused deflationary pressure. With that said, we have seen a notable rise in inflationary pressure this year, largely driven by an increase in the cost of goods. The Fed is continuing to closely monitor various inflation metrics. Comments from the Fed’s recent March meeting indicate that the central bank views the ongoing rise in prices as temporary. Consequently, the Fed is willing to let inflation run above its stated 2 percent target for some time in order to support the ongoing labor market recovery.
What to Look Forward To
On Tuesday, the Consumer Price Index for March will be released. Consumer prices are expected to show 0.5 percent growth during the month, in a slight increase from the 0.4 percent uptick in February. On a year-over-year basis, economists expect to see consumer prices go up by 2.5 percent, rising above the 1.7 percent year-over-year rate recorded in February. Rising gas prices are part of reason why these increases are anticipated. Core consumer inflation, which strips out the impact of volatile food and energy prices, is expected to show a more modest 0.2 percent monthly increase and a 1.5 percent increase on a year-over-year basis. Inflation remained muted throughout much of last year due in large part to the deflationary pressures created by the pandemic. This year, however, we have seen an increase in inflationary pressure as the economic recovery has accelerated.
Thursday will see the release of the initial jobless claims report for the week ending April 10. Economists expect to see the number of initial unemployment claims fall from 744,000 to 700,000 during the week. If estimates hold, this report would bring the four-week moving average for initial claims to a new post-lockdown low, highlighting the ongoing improvement in the pace of weekly layoffs. As more and more states ease restrictions, this trend should support continued progress in getting the number of weekly initial unemployment claims down. This process may take some time, however, as some states have been slower to reopen than others. Ultimately, further progress in lowering the number of weekly claims is expected over the coming months, but continued volatility is likely as states continue with uneven reopening plans.
Also on Thursday, the March retail sales report will be released. Retail sales are expected to increase by 5.4 percent during the month, following a 3 percent decline in February. If estimates prove accurate, this report would represent a healthy rebound in spending growth following February’s disappointing decline. February’s lull in sales growth was primarily driven by unseasonably cold weather, as well as diminished federal stimulus payments during the month. In March, however, normal weather and the recent round of stimulus checks should support a swift return to sales growth. Also in March, consumer confidence surged to a post-pandemic high, and this indicator has historically signaled faster consumer spending growth ahead. If sales growth does rebound in March, it would be a good sign for the continued economic recovery. Consumer spending accounts for the majority of economic activity in the country.
Thursday will also see the release of the March industrial production report. Economists expect industrial production to rebound in March, following a weather-related pullback in February. Estimates are calling for a 2.7 percent increase in production during the month, against February’s 2.2 percent decline. Manufacturing output is expected to show a strong 4 percent monthly increase, following a 3.1 percent decline in February. Industrial production and manufacturing output were both negatively affected by the winter storms in February. A swift return to growth in March would be a sign that moderating weather allowed for a return to more normal business conditions during the month. Manufacturing confidence rose to a new post-pandemic high in March, which is expected to support faster levels of manufacturing spending and output. Overall, if estimates prove accurate, this report would be a positive signal for business spending and output as we head into the spring. It would also represent another sign that the negative impact from the winter weather from February is behind us.
The fourth major report scheduled for Thursday is the release of the National Association of Home Builders Housing Market Index for April. This gauge of home builder sentiment is expected to improve from 82 in March to 84 in April. If estimates prove accurate, this report would bring the index back to its February level, signaling continued high levels of home builder confidence. The index rebounded swiftly after hitting a lockdown-induced low of 30 last April. Low mortgage rates and shifting home buyer preference due to the pandemic fueled this rally for the housing sector over the past year. Home builder confidence remains well above pre-pandemic levels and near the record high the index set in November 2020 despite rising lumber and construction costs. Looking forward, home builder confidence near current levels would signal continued expansion for the housing sector and future levels of new home construction.
On Friday, March’s building permits and housing starts reports are set to be released. These two measures of new home construction are expected to rebound following weather-related declines in February. Building permits are expected to increase by 1.7 percent during the month, while starts are expected to jump by 13 percent. Building permits and housing starts can be quite volatile on a month-to-month basis, but these indicators have rebounded well following the end of initial pandemic-related lockdowns last year. High levels of home builder confidence and low levels of available homes to purchase have spurred a surge in new home construction over the past year, with single-family homes leading the increase. If estimates hold, these reports would be a positive signal that the slowdown in new home construction in February was largely a weather-related lull rather than the start of a negative trend. Given the continued high levels of buyer demand and low amount of supply of homes for sale across the country, any additional new home construction would be a positive sign for the housing sector.
We’ll finish the week with Friday’s release of the preliminary estimate of the University of Michigan consumer sentiment survey for April. This widely followed measure of consumer confidence is expected to improve to start the month. Economist forecasts are calling for a rise from 84.9 in March to 89 in April. If estimates prove accurate, this release would mark two consecutive months of improved consumer sentiment, bringing the index to a new post-pandemic high. The improvement we saw for the index in March was largely driven by advances on the public health front and further progress in returning to a more normal economic environment. Although work must be done to get confidence back to pre-pandemic levels, we are currently heading in the right direction. A few more months with similar levels of improvement would see the index approach the 2020 high of 101 recorded last February.
That’s it for this week—thanks for reading and stay safe!