Posted by Sam Millette, May 24, 2021
In his Monday Update, Commonwealth’s Sam Millette highlights jobs, housing, consumer confidence, durable goods orders, and personal income and spending.Last week saw a number of economic updates, with a focus on housing, the minutes from the Fed’s most recent meeting, and the weekly initial jobless claims report. This will be another busy week for updates, with news to come on consumer confidence in May and April’s durable goods orders and personal income and spending reports.
Last Week’s News
On Monday, the National Association of Home Builders Housing Market Index for May was released. Home builder sentiment remained healthy during the month, as the May index was unchanged at 83, in line with economist estimates. This strong result left home builder confidence near the record high of 90 set in November 2020, signaling robust levels of confidence. Home builder sentiment rebounded swiftly following the end of initial lockdowns last year, as low mortgage rates and high home buyer demand sparked a rally for the housing sector. Supply of homes for sale remains low across much of the country, which has served as another tailwind for increased home builder confidence and construction over the past year. This release was a positive signal that home builders remain confident in the current housing market expansion despite rising material and construction costs. This is a good sign for construction growth in the months ahead.
Speaking of construction, Tuesday saw the release of the April building permits and housing starts reports. Permits increased by 0.3 percent during the month, against calls for a 0.6 percent rise. Starts fell by 9.5 percent in April, following an upwardly revised 19.8 percent increase in March. This decline was larger than the 2 percent drop in housing starts economists expected. Home builders cited supply chain disruptions and rising lumber costs as factors leading to slower construction growth in April. These two measures of new home construction can be volatile on a month-to-month basis; however, both have increased notably since initial lockdowns were lifted last year. New home construction has been supported by the limited supply of homes for sale, as well as high levels of home buyer demand and builder confidence. While the larger-than-expected decline in starts in April disappointed against expectations, continued high levels of home builder confidence and home buyer demand should support construction in the months ahead.
On Wednesday, the FOMC meeting minutes from the Fed’s April meeting were released. The Fed cut interest rates to virtually zero at the start of the pandemic, and there were no changes to interest rates at this meeting. In addition, the Fed did not make any changes to the ongoing $120 billion a month bond purchase program. Given the lack of surprises at the April meeting itself, economists were largely focused on any language in the minutes hinting toward the path of future monetary policy. The minutes showed that some board members have reacted to rising inflationary pressure with calls to discuss tapering asset purchases at future meetings. These hawkish views were in the minority across the board, however. Still, the increasing focus on rising inflation from some board members is worth noting. It indicates that conversations surrounding when and how to taper asset purchases will likely continue at the Fed’s regular meetings. Ultimately, the April minutes showed that the Fed remains supportive and is unlikely to raise rates any time soon. Nonetheless, further discussion on potentially tapering asset purchases at future meetings appears likely.
Thursday saw the release of the weekly initial jobless claims report for the week ending May 15. The number of initial claims fell during the week by more than expected, dropping from 478,000 to 444,000. Calls had been for a more modest decline to 450,000. This result marks a new pandemic-era low for initial unemployment claims, with three straight weeks with declining initial claims. Initial claims can be very volatile on a weekly basis, but we’ve seen a steady decline in claims this year, after they peaked at 904,000 early in January. The improvements have largely been driven by progress on the public health front and the associated easing of state and local restrictions on businesses and consumers. Much of the improvement for the labor market this year has focused on the hard-hit leisure and hospitality sector. Looking forward, continued reopening efforts are expected to support the ongoing labor market recovery.
We finished the week with Friday’s release of the April existing home sales report. The pace of existing home sales fell by 2.7 percent during the month, below economist estimates for a 1 percent increase. This report marks three straight months with declining existing home sales, as low inventory levels and rising prices continued to hold back faster sales growth. The report showed the median sales price increased by 19.1 percent on a year-over-year basis in April. Over the same period, the supply of existing homes for sale was down by 20.5 percent. Still, despite the slowdown in sales over the past three months, they are still well above pre-pandemic levels. On a year-over-year basis, the pace of existing homes sales was up by 33.9 percent in April. In the short term, low levels of supply and rising prices may remain a headwind for significantly faster sales growth. Ultimately, however, if we continue to see sales near current levels, this report will indicate that the housing market remains strong.
What to Look Forward To
On Tuesday, the April new home sales report is set to be released. The pace of new home sales is expected to fall by 7 percent during the month, following a 20.7 percent surge in March. The jump in March brought new home sales to their highest level since 2006, so the anticipated pullback in April is understandable. New home sales are a smaller and more volatile portion of total sales compared with existing home sales. Still, despite the monthly volatility, the pace of new home sales has increased notably compared with pre-pandemic levels. If estimates hold, this segment will be up by more than 66 percent on a year-over-year basis in April. Some of this large year-over-year growth is due to comparisons with the results of last April, when new home sales plummeted during the initial lockdowns. Even accounting for the April drop, however, new home sales have been supported by low mortgage rates and high home buyer demand over the past year.
Tuesday will also see the release of the Conference Board Consumer Confidence Index for May. This widely followed gauge of consumer sentiment is expected to decline slightly from 121.7 in April to 119.4 in May. This modest decline would echo the results for the preliminary estimate of the University of Michigan consumer sentiment survey for May. If estimates hold, this release would represent the second-highest level for the index since the start of the pandemic. Confidence has improved notably this year, as the index is expected to remain well above the 87.1 reading we saw in December 2020. Improvements on the public health front and additional federal stimulus payments have supported the rise in consumer confidence we’ve seen so far this year. Given continued progress with vaccinations and the accelerated reopening efforts throughout much of the country, confidence is expected to remain high as we head into the summer months. This should support additional consumer spending growth.
On Thursday, the preliminary estimate for the April durable goods orders report is set to be released. Orders of durable goods are expected to increase by 0.8 percent during the month, matching the 0.8 percent uptick in March. If estimates hold, this release will mark 12 consecutive months with rising durable goods orders. Starting last May, orders rebounded swiftly once initial lockdowns were lifted. Core durable goods orders, which strip out the impact of volatile transportation orders, are expected to increase by 0.7 percent in April, following a 1.9 increase in March. This result would mark two consecutive months with rising core durable goods orders, following a weather-related slump in February. Core durable goods orders are often viewed as a proxy for business investment. So, continued growth in April would be a positive sign that business have continued to spend, even though core durable goods orders have already surpassed pre-pandemic levels.
Thursday will also see the release of the initial jobless claims report for the week ending May 22. Economists expect the number of initial unemployment claims to decline from 444,000 to 425,000. If estimates prove accurate, this report would bring the pace of weekly layoffs to its lowest level since the start of the pandemic. It would also mark four straight weeks with declining initial claims. Still, despite the impressive improvement in the pace of jobs lost throughout the year, the number of weekly initial claims remains high on a historical basis. This fact, along with the slowdown in hiring in April, indicates the labor market continues to face stress. Accordingly, this release will continue to be widely monitored, as it provides economists with an up-to-date look at the labor market recovery.
On Friday, the personal income and personal spending reports are set to be released. Spending is expected to increase by a healthy 0.5 percent during the month, following a stimulus-induced 4.2 percent surge in March. This result would mark two straight months with personal spending growth, signaling that the tailwind from the recent stimulus payments lingered into April. Personal income has been very volatile on a month-to-month basis throughout the pandemic, driven by shifting federal stimulus and unemployment payments. In March, the stimulus payments caused incomes to spike by a record 21.1 percent. In April, economists expect to see personal income decline by 15 percent. Still, despite the anticipated income drop, consumer spending is expected to remain robust. It should be supported by high levels of consumer savings and continued progress on vaccinations and reopenings, as well as high levels of consumer confidence.
That’s it for this week—thanks for reading and stay safe!
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