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Economic & Housing Weekly Note

Severe Weather in February Temporarily Dampens the Pace of Recovery

March 19, 2021

Key Takeaways:

  • The Federal Open Market Committee (FOMC) kept the target rate for the federal funds rate unchanged at 0.0 to 0.25 percent at its March 16-17 meeting, while also keeping the pace of asset purchases unchanged. The FOMC released new economic projections, showing a more positive outlook for economic growth and unemployment in 2021, while also increasing the outlook for inflation above its two-percent target in 2021. Given the Fed’s willingness to let inflation run above 2.0 percent over a certain time period, the projections suggest that despite the improved economic outlook, the federal funds rate will likely remain unchanged at the zero-lower bound through at least 2022.
  • Retail sales and food services fell 3.0 percent in February, according to the Census Bureau. Sales fell across almost all major categories. Sales at building supply stores fell 3.0 percent, nonstore sales fell 5.4 percent, and sales of motor vehicles and parts fell 4.2 percent. Sales at gas stations, one of the few bright spots, rose 3.6 percent. Core retail sales (excluding auto, building materials, food services, and gas stations) fell 3.5 percent. Despite the decline, retail sales and food services were still 6.3 percent above the level seen a year ago.
  • Industrial production, a gauge of output in the manufacturing, utility, and mining sectors, fell 2.2 percent in February, according to the Federal Reserve Board. Both mining and manufacturing output declined sharply, while utilities output surged 7.3 percent, driven by the cold weather experienced in February.
  • Import prices increased 3.0 percent from a year ago in February, the fastest pace of annual growth since October 2018. Core import prices (excludes fuel prices) increased 2.8 percent from a year ago, the fastest pace of annual growth in just over nine years.
  • Housing starts dropped 10.3 percent in February to a seasonally adjusted annualized rate (SAAR) of 1.42 million, the slowest pace since last August, according to the Census Bureau. Single-family starts fell 8.5 percent to a SAAR of 1.04 million. Single-family permits declined 10.0 percent to a SAAR of 1.14 million. Multifamily starts fell 15.0 percent to a SAAR of 381,000, and multifamily permits declined 12.5 percent to a SAAR of 539,000.
  • The National Association of Home Builders/Wells Fargo Housing Market Index fell 2 points in March to 82. The present single-family sales index fell 3 points to 87, while the index for single-family sales over the next six months rose 3 points to 83. The traffic of prospective buyers index was unchanged at 72.
Forecast Impact:

While the economic data released this week looked weak, the February declines were mostly due to the severe weather experienced by much of the country over the month. The decline in retail sales was likely affected by the weather and also the waning effect of the $600 stimulus checks, though the overall level of sales remained elevated, which supports our outlook for consumer spending in the first quarter. Also, since the enactment of the $1.9 trillion “American Rescue Plan Act” on March 11, the IRS estimated on March 17 that it had already sent payments to approximately half of all eligible households. We believe this will likely lead to a boost in March retail sales, which could mean we’ll need to increase our expectation for consumer spending and GDP in the first quarter. Similarly, while industrial production fell in February, this was mainly a result of the shutdown of gas and oil production in Texas during the severe cold weather and will likely rebound in March as those operations return to normal. In terms of inflation, while import prices are rising on an annual level, it would take significantly more growth for the Fed to consider acting, according to comments made by Chairman Powell during his latest press conference. In housing, construction activity was likely disrupted by abnormally cold weather in February and the related widespread power outages in Texas. This, combined with the rate of permits significantly outpacing the level of starts during the past two months, leads us to expect a near-term bounce-back in single-family starts over the upcoming months.

Ricky Goyette
Economic and Strategic Research Group
March 19, 2021

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