Economic & Housing Weekly Note

A Warm January Boosts Retail Sales While Weighing on Industrial Production

Key Takeaways:

  • Retail sales rose in January, though core sales were unchanged after a downward revision of two-tenths to the prior month, well below consensus expectations. Headline retail sales were boosted by strength in sales at building supply stores thanks to the unseasonably warm weather in January, which supports our expectation for strength in housing in Q1.
  • Industrial production fell 0.3 percent in January, driven down by a Boeing-related drop in manufacturing production and a weather-related decline in utilities output, though manufacturing output increased 0.3 percent when excluding civilian aircraft production.
  • Headline CPI rose 2.5 percent in January from a year earlier, the fastest pace of growth since October 2018, while core CPI grew 2.3 percent, unchanged from last month.
  • The overall mortgage market delinquency rate for mortgage loans on one-to-four-unit residential properties dropped 20 basis points in Q4 2019 to a seasonally adjusted rate of 3.77 percent of all loans outstanding, the lowest rate since Q3 1972. The overall mortgage market serious delinquency rate fell 12 basis points from the prior quarter to 0.90 percent, the lowest level since Q3 2005.

Forecast Impact

January retail sales remained relatively robust, despite the below-consensus core retail sales number. Coupled with the weather-related decline in utilities production, consumer spending is starting out Q1 weaker than expected, though given the continued strength in the labor market, this is not a trend we expect to continue. The strong growth in sales at building supply stores is entirely due to the unseasonably warm weather in January, but its strength means that we will most likely bump up our expectations for Q1 residential fixed investment. The decline in industrial production is not a surprise given Boeing’s January halt in 737 MAX production along with the weather-related decline in utilities output, but excluding the downturn in aircraft manufacturing, the industrial production report seems to support our view that weakness in manufacturing has bottomed out.

Headline Retail Sales Increase in January While Core Sales Remain Unchanged
Percent of Mortgage Payments Past Due Falls to Lowest Level Since 1972

Details on Key Takeaways and Other Releases

  • Retail sales (including food services) increased 0.3 percent in January, according to the Census Bureau, while sales were revised downward one-tenth in December. Sales at gas stations fell 0.5 percent, while sales at building supply stores rose 2.1 percent to the highest level in a year, likely influenced by the warmer-than-average January weather. Excluding motor vehicles and parts, retail sales increased 0.3 percent. Core retail sales (excluding food services, auto, building supplies, and gas station sales) were essentially unchanged from the downwardly revised 0.3 percent growth in December. Sales at non-store retailers rose 0.3 percent, while sales at clothing stores plummeted 3.1 percent by the largest amount since March 2009. From a year ago, retail sales increased 4.4 percent, while core sales rose 3.1 percent.
  • Industrial production, a gauge of output in the manufacturing, utility, and mining sectors, fell 0.3 percent in January, according to the Federal Reserve Board. The manufacturing component dipped 0.1 percent due to a 7.4 percent decrease in aerospace and miscellaneous transport equipment, a result of Boeing’s halt in production of the 737 MAX. Excluding civilian aircraft production, manufacturing output rose 0.3 percent. Mining output increased 1.2 percent, though we believe recent declines in oil prices given the decrease in Chinese oil demand do not bode well for a sustained increase in mining output. Utilities output fell 4.0 percent, with electric utilities falling 3.2 percent, due to the warmer weather in January. From a year ago, industrial production fell 0.8 percent.
  • The Consumer Price Index (CPI) ticked up 0.1 percent in January, dragged down by a 0.7 percent decline in energy prices. Core CPI rose 0.2 percent in January. From a year ago, headline CPI rose by 2.5 percent, an acceleration of two-tenths compared to December, and the fastest pace of growth since October 2018, though this was partially due to the sharp deceleration seen at the beginning of 2019. This acceleration was also partially driven by a 6.2 percent increase in January energy prices. Core CPI grew 2.3 percent year over year for the fourth consecutive month.
  • The Mortgage Bankers Association National Delinquency Survey for Q4 2019 showed that the delinquency rate for mortgage loans on one-to-four-unit residential properties dropped 20 basis points to a seasonally adjusted rate of 3.77 percent of all loans outstanding, the lowest rate since Q3 1972. The percentage of loans on which foreclosure actions were started was unchanged at 0.16 percent. The survey also showed that the serious delinquency rate (the percentage of loans that are 90 days or more past due or in the process of foreclosure, not seasonally adjusted) fell 12 basis points from the prior quarter to 0.90 percent, 13 basis points below the rate from a year ago and the lowest level since Q3 2005. The delinquency rate for all FHA mortgage loans rose 16 basis points, while the delinquency rate for all VA loans fell 29 basis points, the lowest since Q2 1973.

Ricky Goyette
Economic and Strategic Research Group
February 14, 2020

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