I’m a numbers guy, so I get a real kick out of reviewing the latest economic data and identifying which pockets of the economy are heating up and which are slowing down. However, with breaking economic news coming out nearly every day, I understand that it can be a hassle keeping up with each and every report. So every Friday in this blog I hit the past week’s highlights and provide my take on the latest economic trends. Let’s take a look at this week’s big headlines:
#1—U.S. Consumers Are Making a Comeback
In April, retail sales rose 0.1%. This was substantially better than economists’ consensus estimate of a 0.6% decline. Excluding sales at gas stations, which declined 4.7% due to lower fuel prices, overall retail sales actually rose a very healthy 0.7%. Also notable is that vehicle sales remain strong, rising 1%, clothing sales rose 1.2% and building material sales rose 1.5%. Essentially all the retail sale categories, except gas stations, rose impressively in April. This is a good indicator that persistent consumer spending should continue to drive steady GDP growth.
#2—The Global Slowdown is Weighing On U.S. Manufacturing
In April, industrial production declined 0.5%, underperforming the consensus estimate (which called for a 0.2% drop). This was due predominately to a 3.7% drop in utility output, which in turn fell due to unusually mild weather. Manufacturing output declined by 0.4% in April, while mining output rose 0.9%, led by crude oil exploration. Meanwhile, April industry capacity utilization fell to 77.8%, down from 78.3% in March. Unfortunately this represents the largest decline in industrial production in eight months. It is clear that U.S. manufacturers are feeling the squeeze of the global slowdown and the ongoing federal budget cuts.
#3—Jobless Claims Are Holding Steady
Last week, jobless claims jumped 32,000 to an annual rate of 360,000. This was a more dramatic rise than economists had predicted—the consensus had called for claims to rise to a rate of 335,000. Meanwhile, the four-week moving average rose by 1,250 to 339,250. Despite the unexpected rise, the four-week moving average still remains comfortably below 400,000. Typically, the U.S. economy creates payroll jobs when initial claims fall under 400,000, so we’re in decent shape as long as we remain below that benchmark.
#4—The Lack of Inflation Fuels The Fed’s Policies
In April the Producer Price Index (PPI) plunged 0.7%; this was a steeper drop than the 0.5% decline forecast by economists. What really weighed on wholesale prices last month were lower gasoline prices, which plunged 6%, and wholesale food prices, which fell 0.8%. But excluding volatile food and energy prices, core PPI rose 0.1%. Overall, wholesale prices posted the biggest drop in over three years (since February 2010). A strong U.S. dollar continues to put downward pressure on food and energy prices, since commodities are priced in U.S. dollars. So as long as the U.S. dollar remains strong and the energy glut persists, food and energy prices will likely remain soft.
The Consumer Price Index (CPI) also declined 0.4% in April, compared to analyst expectations of a 0.2% drop. The drop was deeper than expected due to a 4.3% decline in energy prices, including an 8.1% drop in gasoline prices. Excluding food and energy, the core CPI rose 0.1%, which was also below economist expectations of a 0.2% rise. In the past 12 months, the core CPI has risen just 1.7%, which is the lowest rate in two years. The overall CPI is now at its lowest level since 2010. So with the lack of inflation, the Fed has a green light to continue its 0% interest rate policy.
#5—The Housing Recovery Is Picking Up Momentum
In April, housing starts declined 16.5% to a seasonally adjusted rate of 853,000. This was well below economists’ expectations of a 915,000 annual rate. The main culprit was a 37.8% drop in apartment construction; meanwhile, single-family home starts only declined 2.1%
At the same time, building permits in April rose 14.3% to an annual rate of 1,017,000. This was stronger than the 950,000 consensus estimate. The building permits results included a 37.5% surge in apartment permits and a 3% increase in single-family permits.
The building permits report suggests that May’s housing starts will be much stronger. Overall housing starts are 13.1% higher they were a year ago, so it appears that the housing sector is still continuing to recover. Most economists expect housing starts to rise to a 1.6 million annual pace before supply can meet demand, so housing starts will likely continue to steadily rise in the upcoming months.
#6—We’re Headed For Slower Growth In the Second Quarter
In April, the Leading Economic Indicators (LEI) index jumped 0.6%. This was better than the 0.3% rise forecast by economists and represents a reversal from the 0.2% drop we saw in March. Seven of the 10 LEI components contributed to this growth, including building permits, jobless claims and the interest rate spread. Meanwhile consumer sentiment weighed on the reading. This report was a strong end to a somewhat mixed week for economic news. As it stands, economists expect the U.S. economy to grow around 2% in the second quarter—this is slower than the 2.5% rate we saw in the first quarter.
Have a nice weekend,