NAM: Monday Economic Report
Retail sales fell 1.3% in May, pulled lower by sharply reduced sales at motor vehicles and parts dealers, among other segments. Yet, it is important to put the current data into perspective. Retail spending has soared 18.0% since February 2020, buoyed by stimulus benefits and a rebounding economy.
In addition, retail sales should continue to grow strongly over the coming months as the U.S. economy continues to reopen and as supply chain disruptions in the marketplace stabilize.
Manufacturing production rose 0.9% in May, bouncing back after edging down 0.1% in April. More importantly, output in the manufacturing sector is off just 0.5% from pre-pandemic levels, and manufacturing capacity utilization increased from 74.9% in April to 75.6% in May, the best rate since December 2019.
Manufacturing activity in the New York and Philadelphia Federal Reserve Bank districts expanded solidly once again in June, even with some easing. In the Empire State Manufacturing Survey, delivery times narrowed to the slowest on record, and in both regions, input and final product prices continue to accelerate sharply.
New residential construction activity rose 3.6% from 1,517,000 units at the annual rate in April to 1,572,000 units in May, with stronger single-family and multifamily housing starts. While activity has decelerated in the past couple months, housing starts remain solid overall despite rising construction costs and difficulties in finding talent.
Home builders remain optimistic about growth over the next six months, and housing permits signal continued strength moving forward. Housing permits have risen 13.7% since February 2020, with single-family and multifamily permitting up 12.0% and 17.5% over the past 15 months, respectively.
Producer prices for final demand goods jumped 1.5% in May. Excluding food and energy, producer prices for final demand goods rose 1.1% in May, a new monthly record. At the same time, costs for transportation and warehousing soared 1.9% in May, extending the record 2.1% gain in April.
Over the past 12 months, producer prices for final demand goods and services have jumped a seasonally adjusted 6.5%, the biggest increase on record. Over the past 15 months, producer prices have risen 5.2%, and core producer prices have risen by a record 5.3% since May 2020, with a gain of 4.3% since February 2020.
The Federal Open Market Committee kept the target federal funds rate unchanged at zero to 25 basis points, as expected. While inflation has risen sharply, the Federal Reserve continues to feel that such increases are transitory, the result of very strong pent-up demand and supply shocks that will likely abate over the coming months.
The Federal Reserve also released the latest economic projections , with participants expecting 7.0% real GDP growth in 2021 and core PCE inflation averaging 3.0% this year. Despite these robust figures, the FOMC sees growth moderating to 3.3% in 2022, with core PCE inflation stabilizing to 2.1% next year. The unemployment rate is seen falling to 4.5% in 2021 and 3.8% in 2022, essentially bringing the U.S. labor market to full employment over the next year or so.
As the economy continues to improve, the Federal Reserve will be under increasing pressure to normalize its extremely accommodative policies. I would expect that the Federal Reserve will start to taper, or slow, its asset purchases later this year. In addition, once these purchases have ended, I would forecast a federal funds rate increase in mid-2022.
With that said, the Federal Reserve’s monetary policy moves will hinge on incoming data. If pricing pressures are less transitory than the FOMC assumes, it might need to accelerate its normalization plans.