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Economic & Housing Weekly Note

The Fed ‘Talks About Talking’ About Tapering While Price Measures Continue to Increase

June 17, 2021

Key Takeaways:

  • As expected, the Federal Open Market Committee (FOMC) maintained its accommodative stance at its June 15-16 meeting, leaving both the pace of asset purchases and the federal funds rate unchanged. The committee increased its overall outlook for PCE inflation after concluding that some supply shortages may be longer-lasting than anticipated. The annual inflation number was revised upward from 2.4 percent to 3.4 percent for 2021. Chairman Powell stated in his press conference that this meeting could be considered the “talking about talking” meeting in terms of the FOMC’s plans to taper asset purchases. The FOMC’s projections also showed 50 basis points in expected rate hikes in 2023, though Powell reiterated that the Fed’s first step to tighter policy would be limiting asset purchases. 
  • Retail sales fell 1.3 percent and core retail sales (excluding food services, autos, building supplies, and gas stations) declined 0.7 percent in May, according to the Census Bureau. However, both the March and April gains in headline and core retail sales were revised upward. Large declines in May were recorded for sales of furniture, motor vehicles, and building supplies, the last of which fell by 5.9 percent, the largest decline since 2010. Sectors associated with the economic reopening fared better with rising sales at restaurants, clothing stores, and health and personal care stores.
  • Industrial production, a gauge of output in the manufacturing, utility, and mining sectors, rose 0.8 percent in May, according to the Federal Reserve Board. All three subcomponents rose with manufacturing, mining, and utilities up 0.9, 1.2, and 0.2 percent, respectively. While industrial production has risen for the past three months, the index remains 1.4 percent below February 2020 levels.
  • The Producer Price Index (PPI) for final demand of goods and services rose 0.8 percent in May. On an annual basis, headline and core PPI gains accelerated to 6.6 percent and 5.3 percent, respectively, record highs for both. Import prices rose 1.1 percent in May and 11.3 percent from a year ago, the fastest annual pace of growth since September 2011. The Bureau of Labor Statistics produces both of these reports.
  • Housing starts rose 3.6 percent in May to a seasonally adjusted annualized rate (SAAR) of 1.57 million, according to the Census Bureau. Single-family starts rose 4.2 percent to a SAAR of 1.10 million. However, April’s numbers were revised lower and the pace of single-family housing starts in May was near the lower end of its range since last summer’s post-COVID outbreak rebound. Still, single-family starts at 1.10 million is 23.5 percent higher than the 2019 average. Multifamily starts rose 2.4 percent to a SAAR of 474,000. Single-family permits fell 1.6 percent to a SAAR of 1.13 million, while multifamily permits fell 5.8 percent to 551,000.
  • The National Association of Home Builders/Wells Fargo Housing Market Index fell 2 points to 81 in June, the lowest level since last August. A reading above 50 indicates that more builders view the single-family market as “good” rather than “poor.” Both the present sales and sales in the next six months components fell by 2 points to 86 and 79, respectively. The traffic of prospective buyers component also declined by 2 points to 71.  
Forecast Impact:
After a stimulus check-driven spike in March, retail sales cooled in April before falling in May. Large declines in sales of furniture, motor vehicles, and building supplies were likely the result of supply shortages either limiting availability or pricing people out of the market. Core retail sales, which are an input for the consumer goods spending component of GDP, declined in May, but upward revisions to the prior month support our view of double-digit growth in Q2 consumer spending. The increase in industrial production continues to point to recovery in the manufacturing sector. The bulk of the manufacturing gain came from the output of motor vehicles and parts, though motor vehicle production continues to be hampered by semiconductor chip shortages. These same supply shortages are also leading to price increases of imports and inputs for producers, though we believe these specific price increases should prove to be transitory as these supply chain disruptions ease. In housing, despite single-family starts trending modestly downward in recent months, given the recent decline in lumber prices and a strong backlog of homes sold-but-not-yet-started, we expect some upward movement in single-family starts in the coming months as delayed and put-off projects are initiated.

Ricky Goyette
Economic and Strategic Research Group
June 17, 2021

Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.