Monday Update: Weaker Than Expected

Last week’s economic data was unexpectedly weak, with disappointing news on both retail sales and industrial production. Although forward-looking indicators are improving, the past week’s numbers suggest that the economy hasn’t yet moved beyond the slowdown.

Last week’s news

Consumers remain cautious. U.S. retail sales for March softened across the board:

• The headline retail sales number declined 0.3 percent, down from a prior decline of 0.1 percent and well below expectations of a 0.1-percent gain.
• The decline wasn’t totally unexpected, as motor vehicle sales were known to have dropped; retail sales excluding autos were much better, with a 0.2-percent gain and an upward revision to the previous month, from a 0.1-percent decline to flat. Even this, however, fell below expectations of a stronger 0.4-percent gain and owed a lot to an increase in the price of gasoline.
• Retail sales excluding autos and gas were up by 0.1 percent—down from the previous month’s gain of 0.6 percent, which was revised up from 0.3 percent. The upward revision provides quite a bit of cushion to this month’s data, suggesting that growth was healthier for the two-month period than for last month alone.

Though not great, the news isn’t as bad as it looks. Auto sales were down from very high levels and remain at very high levels, so some degree of pullback isn’t necessarily a disaster. Other, more inclusive spending indicators are also more positive. Overall, however, slowing sales growth suggests that consumers are still worried and unwilling to spend more.

The University of Michigan Consumer Sentiment Index also reflected weaker consumer demand. With a surprising drop from 91.0 to 89.7—the fourth decline in a row, to the lowest level in a year—consumers clearly aren’t feeling any better. From a consumer perspective, the slowdown is continuing.

Industrial production also disappoints. Although there have been signs of stabilization, in line with recent data and the latest ISM Manufacturing survey, production surprised to the downside. It dropped by 0.6 percent, continuing a decline of 0.5 percent the previous month, which was revised downward to a loss of 0.6 percent. The slide reflects the continued downturn in energy production activity, as well as weak utility production. Actual manufacturing also disappointed, with a decline of 0.3 percent, reversing hopes for stabilization.

Inflation remains slow. In the wider economy, consumer prices increased by less than expected, from a monthly decline of 0.2 percent to an increase of 0.1 percent, dropping to an annual increase of 0.9 percent on a headline basis. Despite recent increases, gasoline prices are still about 20 percent lower than they were last year, which continues to hold down the annual inflation rate. Core prices, excluding food and energy, grew more slowly, with the monthly rate down from 0.3 percent to 0.1 percent, and the annual rate down to 2.2 percent. Slower inflation trends are likely to keep the Fed from increasing rates in April.

The week ahead

The limited data scheduled for release this week revolves around housing:

• The National Association of Home Builders survey is expected to improve slightly, rising to 59 from 58.
• Housing starts are expected to remain relatively stable at around 1.17 million.
• Sales of existing homes are expected to rebound by 3.5 percent to an annual rate of 5.26 million.

If these numbers play out, they will suggest that at least one component of the economy continues to be reasonably strong, despite the ongoing slowdown. 

Have a great week!