Industrial Production Picks Up and Consumption Remains Resilient Despite Higher Prices, Suggesting Q4 Growth Rebound

Key Takeaways:

• Retail sales and food services increased 1.7 percent in October, according to the Census Bureau. Goods consumption was generally strong, as sales at motor vehicle and parts dealers rose 1.8 percent, non-store retailer sales (representing primarily online sales) jumped 4.0 percent, and building material stores rose 2.8 percent. However, sales at food service and drinking places were flat. Core retail sales (excluding food services, autos, building supplies, and gas stations) rose 1.6 percent.
• Industrial production, a gauge of output in the manufacturing, utility, and mining sectors, increased 1.6 percent to 101.6 in October, one-tenth higher than its October 2019 level, according to the Federal Reserve Board. Manufacturing output rose 1.2 percent as motor vehicle production surged 11.0 percent. Mining production was up 4.1 percent as the effects of Hurricane Ida faded and utilities output increased 1.2 percent. Capacity utilization for the motor vehicle industry jumped 6.9 percentage points to 69.8 percent, the largest increase since July, though capacity utilization for the industry remains 7.6 percent below the level seen in July.
• Import prices rose 1.2 percent in October and 10.7 percent from a year ago, according to the Bureau of Labor Statistics. Notably, petroleum prices jumped 8.1 percent to the highest level since 2014. Excluding fuels, import prices rose 5.5 percent from a year ago.
• Housing starts fell 0.7 percent in October to a seasonally adjusted annualized rate (SAAR) of 1.5 million units, the slowest pace since April, according to the Census Bureau. Single-family starts declined 3.9 percent to a SAAR of 1.0 million, their fourth straight monthly decline, while multifamily starts increased 7.1 percent to a SAAR of 481,000. The less volatile single-family permits number rose 2.7 percent to a SAAR of 1.1 million units and multifamily permits increased 6.6 percent to a SAAR of 581,000.
• The National Association of Home Builders/Wells Fargo Housing Market Index rose 3 points to 83 in November. A reading above 50 indicates that more builders view the single-family market as “good” rather than “poor.” The index for single-family sales in the present moved up 3 points to 89, while the index for single-family sales in the next six months remained flat at 84. Traffic of prospective buyers increased 3 points to 68, the highest level since June. The press release cited “lack of resale inventory combined with strong consumer demand” as causing the uptick in builder confidence but warned of “lot availability at multi-decade lows” and that “the construction industry currently has more than 330,000 open positions.”

Forecast Impact:

The relatively strong retail sales figure, though tempered by the fact that much of the gain was caused by higher prices in October, supports our forecast of a rebound in personal consumption growth in Q4 compared to last quarter. However, the retail sales report continued to show a higher-than-usual demand for goods, while spending at restaurants was unchanged, which, due to price increases, suggests real spending on dining out declined. This threatens our outlook for further growth moving into next year, given that our assumptions rely on consumers pivoting their demand toward services and away from goods, allowing for increased inventory investment. Still, our forecast is unlikely to change substantially for now given that earlier-than-usual holiday sales may have affected this retail sales report, and recent employment gains have been in line with expectations. The rise in industrial production to a level roughly even with 2019 is encouraging and supports our forecast for inventory restocking and business investment driving growth in coming quarters. Further, the jump in motor vehicle production, caused by a reopening of some auto plants, is supportive of our forecast for eventual easing of some price pressures next year. However, we expect used car prices, which contributed significantly to CPI gains to date, to remain elevated well into 2022 and possibly beyond as new car inventories are critically low and could take years to recover fully.

Given the typically high volatility of the housing starts number and the increase to the more stable permits number for both single-family and multifamily units, we view the overall starts report to be largely in line with our current near-term forecast of a modest increase in starts over Q4. This is further supported by the third consecutive increase in the Housing Market Index. We continue to view supply chain bottlenecks and labor shortages as the primary constraints slowing the completion rate of construction projects. We expect these to gradually resolve and support more building in 2022; however, lot availability is also a constraint, limiting upside to the pace of construction even if these issues are resolved. Therefore, our forecast for housing will likely remain unchanged.

Nathaniel Drake and Rebekah Gutierrez
Economic and Strategic Research Group
November 19, 2021

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