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Economic & Housing Weekly Note

Retails Sales and Industrial Production Reports Show Declines as the Virus Continues to Impact Businesses

April 17, 2020

Key Takeaways:

  • Retail sales (including food services) fell 8.7 percent in March, the largest decline in the 53-year history of the series. The decline was driven by falling sales at motor vehicle stores, home furniture and appliance stores, and clothing stores. Core retail sales (excluding food services, auto, building supplies, and gas stations) rose 1.7 percent, the strongest growth since January 2019, driven by a 26.9 percent increase in sales at grocery stores, the largest increase in the history of the series.
  • Industrial production posted the largest monthly decline in the series’ nearly 100-year history in March, falling to the lowest level since 2017. While every industry group posted declining output, the severe nature of the decline was driven by the manufacturing sector, which has slowed output greatly due to social distancing measures. The capacity utilization rate—a measure of slack in the industrial sector—fell to the lowest level in a decade and to a level typically only seen during recessions.
  • The Conference Board Leading Economic Index (LEI), a gauge of the economic outlook over the next three to six months, dropped 6.7 percent in March to 104.2, following a revised 0.2 percent decrease in February. This is the largest decline in the 60-year history of the LEI and according to the press release “reflects the sudden halting in business activity as a result of the global pandemic and suggests that the US economy will be facing a very deep contraction.”
  • Total housing starts posted the largest decline since 1984 in March with both single-family and multifamily starts posting double-digit declines. On a quarterly basis, total home construction increased for the fifth consecutive quarter, though single-family building slipped slightly in the first quarter. The near-term outlook for home building is bleak, as single-family permits posted the largest decline since the Great Recession. The coronavirus pandemic has also limited builders’ ability to obtain necessary permits, workers, and materials.
  • The National Association of Home Builders/Wells Fargo Housing Market Index fell 42.0 points, the largest drop since the series began in 1985, in April to 30.0, the lowest level since mid-2012. A reading below 50 indicates more builders view the single-family market as “poor” rather than “good.” Both the present expectations component for new single-family sales and the expectation of sales over the next six months fell to 36.0, the lowest readings since mid-2012 for both components.
Forecast Impact

The historic declines in retail sales and industrial production highlight that few, if any, sectors are immune to the nationwide coronavirus-related shutdowns. The sharp drop in retail sales supports our expectations of solidly negative consumer spending in the first quarter, though the decline may be more severe than we first expected. The large decline in industrial production also supports our expectation for negative business investment in the first quarter. These trends will likely continue into the second quarter as consumers stay home and businesses remain closed due to a lack of foot traffic or an inability to operate effectively given social distancing guidelines. Much steeper declines in consumer spending and business investment in the second quarter are likely. For housing, the sharp pull back in housing starts and builder confidence in March suggest that though we still expect residential investment to add to growth in the first quarter, it may be a smaller contribution than we previously forecast. As construction slows and homeowners forgo listing their homes for sale and purchasing new homes, housing activity and residential investment are likely to slow significantly in the second quarter, a trend which will likely continue until infection-avoidance behaviors ease.

 Retail Sales Fall by the Most in Series History, Core Sales Jump From Sales at Grocery Stores


 Single-Family Starts Fall by Largest Amount in the 14 Years, Permits Drop by the Most in 36 Years

Details on Key Takeaways and Other Releases

  • Retail sales fell 8.7 percent in March, according to the Census Bureau. Sales at motor vehicle dealers fell 25.6 percent, the largest drop since 1987. Sales at gas stations dropped sharply, falling 17.2 percent, the largest decline since the end of 2008. Sales at building supply stores defied the overall trend, rising 1.3 percent, suggesting that consumers are using the coronavirus-induced time at home to make repairs and improvements to their homes. From a year ago, retail sales fell 6.2 percent and core retail sales increased 4.2 percent.
  • Industrial production, a gauge of output in the manufacturing, utility, and mining sectors, fell 5.4 percent in March, according to the Federal Reserve Board. Manufacturing, mining, and utility outputs declined 6.3 percent, 2.0 percent, and 4.0 percent, respectively. The capacity utilization rate dropped 4.3 percentage points to 72.7 percent.
  • The Conference Board Leading Economic Index dropped 6.7 percent in March to 104.2. The largest negative contributors were initial unemployment claims and stock prices. The only non-negative contributor was the Conference Board’s Leading Credit Index, which remained flat in March.
  • Housing starts fell 22.3 percent in March to 1.22 million annualized units, according to the Census Bureau. Single-family starts declined 17.5 percent to 856,000 and multifamily starts dropped 31.7 percent to 360,000. The declines were across every region. Multifamily permits rose 4.9 percent to 469,000, while single-family permits dropped 12.0 percent to 884,000. Through the first quarter, multifamily and single-family starts were 44.5 percent and 11.3 percent higher, respectively, than the same period a year ago.
  • The National Association of Home Builders/Wells Fargo Housing Market Index fell 42.0 points in April to 30.0. The component for foot traffic of prospective buyers fell by 43.0 points to 13.0, also the largest decline in the history of the series and the lowest level since September 2011.

Economic and Strategic Research Group 
April 17, 2020

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, including assumptions about the duration and magnitude of shutdowns and social distancing, 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.