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Economic & Housing Weekly Note

Retail Sales Impress as Consumers Offer Glimpse of Their Spending Power

February 19, 2021

Key Takeaways:

  • Retail sales and food services jumped 5.3 percent in January, the largest increase since June 2020, according to the Census Bureau. Sales of motor vehicles and parts rose 3.1 percent. Sales at food services establishments jumped 6.9 percent, though remain 16.6 percent down from a year ago. Sales at building supply stores rose 4.6 percent, a boon for residential investment. Core retail sales (excluding food services, autos, building supplies, and gas stations) surged 6.0 percent, driven by an 11.0 percent increase in sales at nonstore retailers, the largest increase in two years. Core sales also benefited from a 5.5 percent increase in sales at general merchandise stores. From a year ago, retail sales and food services rose 7.4 percent, the fastest annual growth since September 2011.
  • The Producer Price Index (PPI) for final demand of goods and services rose 1.8 percent from a year ago in January, an acceleration of a full percentage point, according to the Bureau of Labor Statistics. Core PPI (which excludes food, energy, and trade services) rose 1.9 percent from a year ago, an acceleration of eight-tenths, tying the fastest annual growth since August 2019.
  • Industrial production, a gauge of output in the manufacturing, utility, and mining sectors, increased 0.9 percent in January, according to the Federal Reserve Board, though the index remains 1.9 percent below the level seen in February 2020. Both manufacturing and mining production increased, while utilities production fell. While the overall manufacturing sector saw an increase in production, the production of motor vehicles and parts fell 0.7 percent. Capacity utilization increased 0.7 percentage points to 75.6 percent.
  • Housing starts fell 6.0 percent in January to a seasonally adjusted annualized rate of (SAAR) 1.58 million units, according to the Census Bureau. Single-family starts dropped 12.2 percent to a SAAR of 1.16 million, while single-family permits rose 3.8 percent to a SAAR of 1.27 million, the highest level since August 2006. Multifamily starts increased 17.1 percent to a SAAR of 418,000.
  • Existing home sales grew 0.6 percent in January to a SAAR of 6.69 million, according to the National Association of REALTORS®. Sales of existing single-family homes rose 0.2 percent to a SAAR of 5.93 million, while sales of condos/co-ops increased 4.1 percent to a SAAR of 760,000. The number of homes for sale was 25.7 percent below January 2020, the largest annual decline since the series began 21 years ago. The months’ supply remained at a record low of 1.9 months. The median existing home price was $303,900, an increase of 14.1 percent from a year ago.
Forecast Impact:

The jump in January retail sales was well above consensus expectations but supports our decision to increase our estimate of consumer spending in the first quarter. Retail sales likely benefited from consumers receiving a further $600 stimulus check. Given the elevated level of personal savings, we currently believe that further stimulus checks coupled with enhanced unemployment benefits will lead to significant levels of consumer spending later in the year as vaccines become widespread and restrictions begin to lift in earnest. While concerns about inflation have surfaced, particularly given the strong growth in PPI, we believe the Federal Reserve is likely willing to downplay any growth in inflation until it has run above the 2.0 percent target level for a certain amount of time. Though manufacturing production increased in January, the current shortage of semiconductor chips is weighing on the motor vehicle industry. This shortage will likely continue in the coming months, and we may need to lower our expectations of business investment or inventories investment. With fewer cars being produced, car dealers may also need to draw down their current stock to make up for the lack of production. Another risk to business investment is mining production. While the decline in January utilities output can be attributed to warmer-than-average weather, we believe utilities production in February will likely rise as much of the country experiences very low temperatures due to the current winter storms. Despite problems with power distribution in Texas and other states given the severe cold, consumption of utilities was likely higher than normal, though the disruption to oil/gas extraction will likely weigh on February mining output and require a draw down in existing oil/gas inventories. In housing, a decline in single-family housing starts was expected, and though we believe the period of rapidly increasing starts has passed, we expect a continued strong construction pace going forward. Although existing home sales increased slightly, the level of sales continues to be constrained by the record low level of available inventories, which will likely continue going forward.

Ricky Goyette
Economic and Strategic Research Group
February 19, 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.