Monday Update (on Tuesday): Retail Sales Beat Expectations in October

Last week saw a number of important economic data releases, including October’s retail sales and industrial production reports, and a look into the housing sector. Both retail sales and industrial production beat expectations, which is a positive sign for overall economic growth to start off the fourth quarter. This will be a busy week for updates, with reports on October’s existing home sales, durable goods orders, and personal income and spending set to be released. We’ll also get the minutes of the most recent Fed meeting.

Last Week’s News

Tuesday saw the release of the October retail sales report. Sales increased by more than expected during the month. The report showed a 1.7 percent increase, against calls for a 1.4 percent rise. Following an upwardly revised 0.8 percent increase in sales in September, the October report marks three consecutive months with strong retail sales growth. Core retail sales, which strip out the impact of volatile auto and gas sales, also increased by more than expected. Core sales went up by 1.4 percent, against calls for a more modest 0.7 percent increase. The growth in October was supported by a 4 percent increase in online sales, but sales strength was widespread across most sectors. This encouraging report demonstrated that consumers remain willing and able to spend, despite headwinds created by rising prices and lower confidence levels.

Tuesday also saw the release of the October industrial production report. Industrial production increased by 1.6 percent, in a healthy rebound following the weather-related 1.3 percent drop in September and well above estimates for a 0.9 percent rise. This result was supported by a rebound in manufacturing production during the month. Manufacturing production increased by 1.2 percent in October, following a 0.7 percent decline in September. Auto production rose by an impressive 11 percent in seasonally adjusted terms, which supported manufacturing output. Overall, industrial production was also supported by gains in energy and materials production, two areas that saw notable declines in September due to Hurricane Ida. Looking forward, high demand is expected to support industrial production and manufacturing output growth. Nonetheless, producers face very real headwinds from tangled supply chains and rising prices.

The third major data release on Tuesday was the release of the National Association of Home Builders Housing Market Index for November. Home builder confidence improved by more than expected during the month. The index increased from 80 in October to 83 in November, against calls for no change. This is a diffusion index, where values above 50 indicate growth, so this result is a positive sign for the pace of new home construction. Home builder confidence now sits at a six-month high and remains well above pre-pandemic levels. Home builder confidence has been supported by low mortgage rates and high levels of home buyer demand throughout the pandemic. In addition, the strong result for November was driven by an increase in prospective home buyer foot traffic. In a positive signal for the strength of the overall market, the number of prospective home buyers hit a five-month high in November. Overall, this report was encouraging. It signaled continued healthy growth for the housing sector as we head toward the end of the year.

Wednesday saw the release of the October building permits and housing starts reports. These measures of new home construction came in mixed. Permits increased by 4 percent during the month, while starts declined by 0.7 percent. The forecasts were for a 2.8 percent increase in permits and a 1.5 percent increase in starts. Despite the mixed results, the overall pace of new home construction remains healthy, as high home buyer demand and low supply of existing homes for sale continue to support construction growth. Looking forward, levels of new home construction are expected to stay high. Home builders have a large backlog of homes permitted for construction but not yet started. As the supply of existing homes for sale remains relatively low on a historical basis, any increase in the pace of new home construction would be a welcome development.

What to Look Forward To

On Monday, the October existing home sales report was released. Sales of existing homes increased by 0.8 percent, against an expected 1.4 percent drop. As a result, the pace of existing home sales hit a nine-month high, signaling the continued strength of demand. Existing home sales, which sit well above pre-pandemic levels, are on track to break the six-million mark for the year, a figure that would represent the highest number of sales in year since 2006. Housing sales have been strong throughout 2021, as low mortgage rates and shifting buyer preferences for more space due to the pandemic have supported a surge despite low inventory and rising prices. This encouraging report showed that prospective home buyer demand remains robust and that the housing sector continues to show healthy growth and recovery.

Wednesday will see the release of the preliminary estimate for October’s durable goods orders. Expectations are for orders to increase by 0.2 percent, following a 0.3 percent drop in September. September’s modest decline in headline orders was largely due to a slowdown in aircraft orders. Core durable goods orders, which strip out the impact of volatile transportation orders, are expected to increase by 0.4 percent in October, building on a 0.5 percent increase in September. Core durable goods orders are often viewed as a proxy for business investment, so continued growth in October would be a positive sign for business spending. If estimates hold, this report would mark eight consecutive months with growth in core durable goods orders, signaling continued business investment and spending to meet high consumer demand.

Wednesday will also see the release of the October personal income and personal spending reports. Personal income is expected to increase by 0.2 percent, following a 1 percent drop in September. Throughout the pandemic, personal income has been volatile on a month-to-month basis, due to shifting federal stimulus and unemployment payments. For example, September saw a decline in personal income that was largely due to the expiration of enhanced unemployment benefits. In October, personal spending is expected to increase by 1 percent, following a 0.6 percent increase in September. If estimates hold, this report would mark eight consecutive months with increased personal spending. Consumer spending has been solid throughout the course of the year, as improving public health statistics and lowered restrictions have allowed consumers to go out and spend freely. Consumer spending is the primary driver of economic growth in the country, so continued improvement in October would demonstrate that the economic recovery is continuing.

We’ll finish the holiday-shortened week with Wednesday’s release of the FOMC minutes from the Fed’s November meeting, during which the Fed announced plans to begin tapering its secondary-market asset purchases. Although the announcement was widely expected and the tapering should be gradual, the plans mark the first major step by the Fed to tighten monetary policy since the start of the pandemic. Economists and investors will be looking to the meeting minutes for insights on how Fed officials view the economic recovery and hints about future policy decisions. Given the Fed’s dual mandate to support stable prices and maximum employment, we should also get some interesting commentary on the risk presented by rising inflationary pressure. Still, no major surprises are expected from this release. Given the importance of the Fed to markets and the economy, this release will be widely monitored.

That’s it for this week—thanks for reading and have a happy Thanksgiving!