It was a busy week for economic data, as evidenced by several robust consumer and manufacturing reports. The numbers continue to point toward a U.S. job recovery, although inflationary pressures are also still present.
It’s important to note that the scope of the economic expansion is broadening. Expectations are rising for corporate profit growth across multiple sectors, and China reported its own record GDP increase.
In the meantime, the Federal Reserve remains supportive of seeing U.S. employment return to pre-pandemic levels. On Wednesday, Chair Jerome Powell reiterated a willingness to keep short-term rates near zero, noting that the Fed would likely taper $120 billion of monthly bond-buying in advance of any future rate increase. These days the Fed’s policy decisions are based more on outcome than on outlook.
WALL STREET WRAP
Retail Sales Boosted by Stimulus: On Thursday, the Census Bureau said that U.S. advance retail sales increased by 9.8 percent in March, or 8.4 percent excluding autos. All 13 categories saw sales improve last month, the definition of a broad recovery, led by demand for sporting goods, hobby, and clothing/accessory stores. Restaurant spending was also up 13.4 percent in March, consistent with the reopening of the economy, and is the only subcategory where spending is not yet back above pre-pandemic levels.
Consumer Prices on the Rise: The Bureau of Labor Statistics stated on Tuesday that the U.S. Consumer Price Index (CPI) increased at a 2.6 percent annual rate. The core rate, which excludes food and energy, grew by 1.6 percent. Outside of energy prices, the largest area of seasonally adjusted price growth last month was in transportation services. We’ve yet to see the same level of growth in consumer prices that has been reported on the producer side in recent months, although it is likely we will see inflationary pressures continue to increase during 2021.
Michigan Survey Shows Continued Consumer Growth in April: The preliminary University of Michigan consumer sentiment data released on Friday showed that both spending and prices will likely continue to grow in April. The headline reading increased to 86.5, led by the current conditions index. Consumers surveyed now expect 3.7 percent inflation over the next year, which was the highest amount reported in nine years. However, five-year expectations for inflation actually moved down to 2.7 percent in this month’s survey, which is consistent with the Fed’s view that price increases should prove temporary.
Jobs Outlook Improved: Another reason for higher consumer activity could be an improving U.S. job market. The Department of Labor reported on Thursday that weekly initial jobless claims fell to 576,000, which was the lowest figure since the COVID-19 pandemic began.
This jobs strength was confirmed by the NFIB Small Business Optimism data on Tuesday, which showed a record 42 percent of companies surveyed had job openings that they struggled to fill in March.
Regional Manufacturing Activity Gained Momentum: Two key regional manufacturing indexes were reported on Thursday, offering an early read of April activity. First, the Empire State manufacturing index jumped from 17.4 to 26.3 on the strength of new orders. Input and selling prices also demonstrated robust increases. Elsewhere, the Philadelphia Fed manufacturing index came in at 50.2 for April, up from a revised 44.5 March reading and marked the highest level since 1973.
Housing Starts Highest since 2006: The Department of Commerce said on Friday that U.S. housing starts increased 19.4 percent in March to the highest level in 15 years. Building permits also grew by 2.7 percent after the sector was hit by adverse weather conditions across most of the country in February.
Record GDP Growth in China: As a strong sign that the economic recovery is also broadening across the globe, China announced record 18.3 percent year-over-year GDP growth for the first quarter on Thursday, led by higher retail spending. China has the largest manufacturing economy in the world and is second only to the U.S. in overall GDP measure.
THE WEEK AHEAD
Chicago Fed and Leading Indicators Give GDP Preview: Following a round of solid data last week, the Atlanta Fed’s first quarter GDPNow estimate currently stands at 8.3 percent quarter-on-quarter annualized growth. The Chicago Fed national activity and Leading Index reports on Tuesday will help provide key insight on just where the final tally may land.
PMI Reports Give Broad April Readings: On Friday, IHS Markit will announce manufacturing and services purchasing managers’ index (PMI) reports for the U.S. and Eurozone. These represent the first broad economic readings for April, and it will be worth noting whether the services sector moves back above the key 50-level in Europe this month.
Home Sales on Deck: Following the robust housing starts and building permits data last week, we’ll get the March existing home sales report Thursday, followed by new sales on Friday. Long-term interest rates have risen since the beginning of the year, which could eventually cut into housing demand that otherwise remained resilient throughout the pandemic.
Earnings Season Heats Up: The banking sector kicked off the first-quarter earnings season on a positive note last week, and 79 companies in the S&P 500 are scheduled to post results this week. Refinitiv now expects that aggregate profit will grow by nearly 31 percent in the first quarter, up from an estimate of 24 percent two weeks ago, led by the Financials, Consumer Discretionary and Materials sectors.
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As the chief investment officer at Northwestern Mutual Wealth Management Company, I guide the investment philosophy for individual retail investors. In my more than 25 years of investment experience, I have navigated investors through booms and busts, from the tech bubble of the late 1990s to the financial crisis of 2008-2009. An innate sense of investigative curiosity coupled with a healthy dose of natural skepticism help guide my ability to maintain a steady hand in the short term while also preserving a focus on long-term investment plans and financial goals.