Core Retail Sales and Industrial Production Beat Consensus Expectations, While Housing Continues to Slump

Key Takeaways:

• The minutes from the Federal Open Market Committee’s (FOMC) July 26-27 meeting showed that participants viewed ongoing increases to the federal funds rate would be appropriate to combat high inflation but that the pace of increases may slow. Even with the federal funds rate now within the range of its longer-run neutral level, some participants noted the real federal funds rate was likely below its shorter-run neutral level given high near-term inflation expectations. Additionally, it was noted that once the federal funds rate was sufficiently restrictive, it would likely be appropriate to maintain that level to ensure “inflation was firmly on a path back to 2 percent.”
• The Conference Board Leading Economic Index® (LEI), a gauge of the economic outlook over the next three to six months, decreased 0.4 percent in July to 116.6, its fifth consecutive monthly decline, and down 1.6 percent since January.
• Retail sales and food services, which are not adjusted for inflation, were flat in July and revised downward modestly in June, according to the Census Bureau. However, the headline weakness was due largely to falling gas prices (gasoline station sales were down 1.8 percent) and ongoing issues with auto manufacturing (sales at motor vehicle and parts dealers declined 1.6 percent). Core retail sales, which exclude food services, autos, building supplies, and gas stations, rose 0.8 percent. Online store sales were especially strong, jumping 2.7 percent.
• Industrial production, a gauge of output in the manufacturing, utility, and mining sector, rose 0.6 percent in July, while June’s figure was revised upward from a decline of 0.2 percent to being unchanged, according to the Federal Reserve Board. Manufacturing and mining output both increased 0.7 percent, while utilities output declined 0.8 percent.
• Existing home sales declined 5.9 percent in July to a seasonally adjusted annualized rate (SAAR) of 4.81 million, the lowest level since April 2014, excluding the initial COVID-related shock and hurricane-impaired months, according to the National Association of REALTORS®. The inventory of existing homes available for sale rose 4.8 percent to 1.31 million but was flat over the year. The months’ supply rose four-tenths to 3.3, its highest reading since June 2020.
• Housing starts fell 9.6 percent in July to a SAAR of 1.45 million, the lowest level since February 2021, according to the Census Bureau. Single-family starts declined 10.1 percent to a SAAR of 916,000, though June’s figure was revised upward by 3.8 percent to a SAAR of 1.0 million units. Multifamily starts declined 8.6 percent to a SAAR of 530,000 but remain at a strong level. Single-family permits declined 4.3 percent, the fifth consecutive monthly decline, while multifamily permits increased 2.8 percent.
• The National Association of Home Builders/Wells Fargo Housing Market Index dropped 6 points in August to 49, the first time the survey dipped below 50 since the onset of the pandemic, meaning more builders now view the housing market as “poor” rather than “good.” The index for single-family sales in the present declined 7 points to 57, while the index for single-family sales in the next six months was down 2 points to 47. The traffic of prospective buyers index declined 5 points to 32.

Forecast Impact:

This week’s economic data continued to paint a mixed picture of the economy’s health, though near-term macroeconomic data was mostly positive. Industrial production, which is an indicator the National Bureau of Economic Research (NBER) uses when dating business cycles, beat expectations despite a somewhat surprising drag from utilities output amid heat waves across much of the U.S. Manufacturing output got a large boost from motor vehicle and parts production, which hit its highest level on record. However, we have yet to see this translate into a significant boost in actual motor vehicle inventories that would ease prices in the new car space, so we are cautious that abnormal seasonal patterns may still be affecting this data. On the consumer side, core retail sales also beat consensus expectations and signal that with gas prices easing and real personal income likely to have increased in July, consumers may be willing to shift their spending to other sectors and boost Q3 personal consumption expenditures. Still, the growth rate for spending at restaurants and bars slowed to just 0.1 percent (likely reflecting a decline in real terms) after averaging more than 2.0 percent monthly growth over the past five months, suggesting the rebound in the services sector may be slowing. On balance, we believe the economy is currently growing at a below-trend pace and further weakness is likely to emerge by early 2023, consistent with our forecast and warnings signs from the LEI.

The housing market has continued to slow amid tighter monetary policy. Existing sales in July were consistent with our current expectations of a continuing softening of sales. New housing starts were also in line with our Q3 forecast, but we expect that future construction may decline further as homebuilder sentiment continues to weaken and single-family permits continue to fall. Therefore, we may modestly revise downward our starts figure in the near-term.

Nathaniel Drake
Economic and Strategic Research Group
August 19, 2022

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