Inflation Starting To Come Back To Earth – Market Update

The high temperature in Detroit as I write this today is 82 degrees and there’s not a cloud in the sky. I’m thriving. I’m not sure the Federal Reserve would say the same, but inflation is showing signs of cooling on the consumer front. Let’s dive into it!

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Econoday has provided much of the analysis found in this report.¹ Ready to dig in?

Retail Sales

Overall retail sales in March were down 1%, according to the Census Bureau. When vehicles were taken out, there was a slight improvement, as sales were only down 0.8%. Finally, sales fell 0.3% when further excluding gas. It’s noted that sales at gas stations were down 5.5%. You may have noticed falling prices.

However, that doesn’t entirely account for the fact that most categories were weaker by a few tenths of a point. In sectors that are important to housing, sales at furniture and home furnishing stores were down 1.2%. Meanwhile, sales at building material and garden supply stores fell 2.1%. The biggest gainer was non-store retailers. Think e-commerce here. Those sales were up 1.9%. Restaurants and bars also are hanging in there, with sales up 0.1%. That indicates there’s still some discretionary spending going on, but overall, there was no Easter bump.

Industrial Production

Industrial production for March was up 0.4% overall, said the Federal Reserve. The major downside was that manufacturing output was down 0.5% for the month. Despite this, capacity utilization for the month came in up 0.2% at 79.8% and there was a sizable upward revision of 1.6% in February utilization numbers.

Much of the growth in the category came from energy as people turned up the heat, coming off an unseasonably warm February. There was an 8.4% increase in utilities production.

Looking more closely at manufacturing, durable goods production was down 0.9% and vehicle manufacturing was down 1.5%. Meanwhile, nondurable goods production was down 0.1%.

Turning to other categories, mining is down 0.5%. At the same time there was a 7% increase in electricity demand and natural gas usage was up 16.5%.

Housing Market Index

While this index of builder confidence is still in contraction, this represents the best number since last September, said the National Association of Home Builders. Overall sentiment is up a single point at 45. Anything over 50 would represent growth in the sector.

Current single-family home sales are up a couple of points at 51. Meanwhile, expected sales in the next 6 months are up 3 points at exactly 50. Holding things back a bit is the traffic number. The reading of 31 is unchanged and represents a relatively small number of prospective buyers walking through.

Mortgage rates falling back a bit and an extremely tight existing home sales market has builder confidence buoyed a bit.

New Residential Construction

Housing completions were down 0.6% in March according to the Department of Housing and Urban Development (HUD) and the Census Bureau, at a seasonally adjusted annual rate of 1.542 million. This is 12.9% higher than the same time a year ago. In good news for those looking at noncommercial properties, completions were up for single-family homes (4 units or less), rising 2.4% at 1.05 million. Multifamily construction added 484,000 units.

Housing starts were down 0.8% at 1.42 million. Unfortunately, this is 17.2% below last year. The good news is single-family starts were up 2.7% at 861,000. Multifamily construction with 5 units or more came in at 542,000.

Permits were down 8.8% to 1.550 million, down 24.8% from last year. Single-family permits, however, were up 4.1% to 818,000, while there were 543,000 multifamily authorizations.

Existing Home Sales

Overall existing home sales were down 2.4% to 4.44 million on a seasonally adjusted annual basis. Year-over-year, sales volume has dropped 22%. It’s worth noting that this is down a little bit from the 23.1% fall off in February.

Inventory remains an issue as it’s only at 2.6 months in March based on the current pace of sales. Median prices of existing homes are up 3.3% on the month at $375,700.

Home listings are on the market for about 29 days according to the National Association of REALTORS^®.

Case-Shiller Home Price Index

On a seasonally-adjusted basis, prices were up 0.1% in the 20 major metropolitan areas tracked in the Case-Shiller index. Overall, prices were up 0.2% in February. Compared to the year prior, prices were up 0.4%. Miami, Tampa and Atlanta outpace Western cities like Las Vegas, Phoenix and Los Angeles.

FHFA House Price Index

The FHFA index only looks at transactions backed by conventional loans. It’s also not a rolling 3-month average like the Case-Shiller index. At the national level, these prices were up 0.5% for the month and 4% since last February.

Consumer Confidence

Overall consumer confidence was down 2.7 points in April to come in at 101.3. There was an almost 6-point decline in expectations for the future at 68.1. Going deeper on that, it’s not a good outlook for future business conditions, employment or income in the mind of the consumer. Fewer people expect more jobs to open up and more people see wages falling in the near future.

Continuing the bad expectations news, plans to buy homes, cars and major appliances are all down according to the survey from the Conference Board.

The good news is that the current conditions index was up better than 2 points at 151.1. There are fewer people who say jobs are hard to get and more who believe they are plentiful.

New Home Sales

Another joint report of the Census Bureau and HUD, sales of new single-family homes were up 9.6% in March at 683,000 on a seasonally adjusted annual basis.had It’s not a bad start for the beginning of home buying season.

The supply of homes for sale is at 7.6 months at the current pace of sales, down from 8.4 months in February. Meanwhile, prices were up 3.8% for the month at a median of $449,800.

A few other interesting statistics are in here. There are 25% of homes that have sold where construction hasn’t started yet. Meanwhile, 39% are currently being built, while a further 36% are finished.

Durable Goods Orders

Durable goods orders are up 3.2% for March 2023, said the Census Bureau. This is a rise of 0.3% when transportation is excluded. Unfortunately, when core capital goods were taken out of the picture, orders were down 0.4%.

A big part of the gains came from the extremely up and down nondefense aircraft category. Orders for these airplanes along with their parts were up 78.4%, to go along with a 10.4% uptick in orders of military aircraft.

Meanwhile, orders for computers and related products were up 1.8% in March. The author made a personal contribution in this category. Additionally, orders of all electrical equipment, appliances and related components saw a 0.8% uptick. Turning to another barometer of demand, unfilled orders were up 0.4% as well.

Gross Domestic Product (GDP)

According to the Bureau of Economic Analysis, GDP for the U.S. in the first quarter showed that the economy grew at a rate of 1.1% based on the initial estimate. This is below last quarter and considerably below the 2% analyst estimates. The good news is the consumer keeps spending because the annual rate is up to 3.7% currently.

Durable goods orders were up 16.9% overall in the quarter while nondurable spending was up 0.9%. Finally, services spending rose 2.3% in this estimate. Government consumption was up 4.7% as well.

Meanwhile, gross investment was down 4.5%. On the negative side, fixed business investment was down 0.7%. Meanwhile, residential investment fell 4.2%, but that’s much better than the 25.1% it fell last quarter.

Finally, net exports improved a bit as the deficit fell by $17.6 billion to $839.5 billion. Private inventories increased by $6.8 billion, but that’s after being up $161.8 billion in Q4.

Pending Home Sales Index

Pending home sales were down 5.2% in March at an index level of 78.9, according to the National Association of REALTORS^®. Lack of inventory is a persistent issue.

Personal Income And Outlays

This index is closely watched because it’s the Fed’s preferred metric for inflation. In fact, let’s start there. Overall prices were up 0.1% for the month and have risen 4.2% for the year. When looking at core categories (that is, taking out food and energy), prices were up 0.3% and 4.6% annually. The Fed’s target is 2%, but it’s starting to come down.

Taking a look at the income side, these were up 0.3%, while March data from the Bureau of Economic Analysis shows that spending was flat.

ISM Manufacturing Index

The manufacturing sector continued to contract in April, but less so than it had in March as the index rose 0.8 points to 47.1 points. Anything over 50 indicates expansion, according to the Institute for Supply Management.

The production index came in up 1.1 points at 48.9 points. A good thing is the employment index was up 3.3 points at 50.2 in April, so some workers may be getting the call back. Supplier deliveries slipped further into contraction, down 0.2 points to 44.6 points. Meanwhile, inventories are shrinking, down 1.2 points at 46.3.

Backlogs continue to fall, but at a slower pace, rising 0.8 points to 43.9 in the index. Meanwhile, prices paid was up 4 points at 53.2 in April. This indicates slightly higher costs.

International Trade

According to the report from the Bureau of Economic Analysis, the International trade rating for March shows that the deficit fell by $6.4 billion to $64.2 billion in the U.S. The nation has a $22.4 billion services surplus and a deficit of $86.6 billion in goods.

However, this was down from a $93 billion goods deficit the month prior. Goods exports were up $5.2 billion while imports fell $1.2 billion. There was a $3.9 billion uptick in exports of industrial supplies led by oil exports.

Employment Situation

There were 253,000 jobs added to the economy in April. This beat consensus estimates. On the downside, 71,000 fewer jobs were created in March than previously thought. However, the unemployment rate continues to fall, reaching 3.4% in April. Additionally, the labor force participation rate remained steady at 62.6%.

Digging into individual sectors, the Bureau of Labor Statistics says 11,000 manufacturing jobs were added to go along with 43,000 in professional and business services. There were 39,600 jobs added in healthcare. In leisure and hospitality, 31,000 people were added to payrolls.

Wages were up 0.5% for the month and they’ve risen 4.4% annually. The average length of the workweek was 6 minutes shorter at 34 hours, 24 minutes.

Consumer Price Index (CPI)

This index from the Bureau of Labor Statistics showed that prices were up 0.4% for the month and 4.9% since last April. The headline number held when removing food and energy, but the annual rate of increase was 5.5%. Both annual numbers are down ever so slightly from March.

Among categories that are higher, there was a 0.4% increase in shelter. It was joined in the higher column by used cars and trucks, auto insurance, recreation, household furnishings and operations, and personal care. Meanwhile, airline tickets and new vehicle costs were down.

Producer Price Index (PPI)

Prices for producers are important to track because the cost usually gets passed on to consumers down the line. PPI was up 0.2% overall in April and 2.3% on the year.

When removing food and energy, it was still 0.2% with a 3.2% annual uptick. When goods and services bought at retail were further removed, price increases for the month remained 0.2%, with a 3.4% annual uptick. In each category, data from the Bureau of Labor Statistics showed that the pace of appreciation was slower than the month prior.

The cost of food was down 0.5% in April and it’s only gone up 2.5% since last year. Meanwhile, energy prices were up 0.8%, 8.1% below a year ago at the same time.

Mortgage Rates

Mortgage rates were down ever so slightly when Freddie Mac sent out its Primary Mortgage Market Survey^® last week. Rates seem to have stabilized quite a bit recently. If you see a rate you like, we encourage you to go ahead and lock.

The average 30-year fixed mortgage rates fell 4 basis points to 6.35%. At this time a year ago, the rate was 5.3%.

Turning to shorter terms, the average rate on a 15-year fixed mortgage fell a single basis point to 5.75%. This has come up from 4.48% last year.

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