Monday Update: Consumers Feel Confident (For the Moment)

The only major report last week was Friday’s release of the University of Michigan Consumer Sentiment Index. It remained essentially stable, with a small decline from 94.7 to 94.3.

• The bad news: This is the fifth decline in the past six months, as consumer caution continues to grow.
• The good news: Even as consumers become more cautious about the future, they remain confident in the here and now. The current level of confidence is consistent with 3-percent growth in spending, and the current conditions indicator is at the highest level since July 2005, well before the crisis, according to Ned Davis Research.

What to expect in the week ahead

We can look forward to more news this week, with reports that span the entire economy.

Retail sales. Due on Tuesday, the retail sales report should indicate whether consumers continue to spend. Headline retail sales are expected to increase by 0.3 percent, in line with last week’s consumer confidence number. Although down from last month’s exceptional figure of 1.3 percent, this result would remain in healthy territory.

Core retail sales, excluding gas, autos, and building materials, are expected to increase by an even stronger 0.4 percent for May. With the three-month annualized gain approaching 5 percent, retail sales should continue to help economic growth.

Industry and manufacturing. Industrial production numbers come out on Wednesday and are expected to drop modestly, by 0.2 percent for overall industrial output. The loss is expected to be driven by a pullback in utility output as weather normalized after an unusual April. For manufacturing, slight growth is expected, at 0.1 percent.

Most of the risk here is on the downside. For manufacturing, in particular, the drop in hours worked suggests output might decline, in keeping with the weakness in regional surveys. In any event, this month’s report is unlikely to show a recovery in the sector.

Housing. Housing data this week includes the National Association of Home Builders survey on Thursday, which is expected to tick up from 58 to 59 on tighter market conditions, as a surge in home sales in April took inventory down for the first time since last summer.

Housing starts will be released on Friday and are expected to drop slightly, from 1.172 million down to 1.15 million. The small expected decline follows a surge in the previous month and should not be a concern. In addition, there is some upside risk in this number, as building permits rose in April, for the first time in 2016.

Inflation. Slated for release on Friday, consumer price data is expected to remain substantially unchanged from last month. Headline inflation growth should drop slightly, from 0.4 percent to 0.3 percent on a monthly basis, but remain constant at 1.1 percent over the past year. Core inflation, excluding energy and food, is expected to remain at 0.2 percent monthly and 2.2 percent over the past year. No news here if expectations are met.

The Fed. Finally, the Federal Open Market Committee meets this week. After the last very disappointing jobs report, expectations are strongly for no rate increase. Markets will be paying close attention to the press conference at the close of the meeting on Wednesday for an indication of whether the Fed is worried about the economy again and whether rate hikes are still possible in 2016.

Have a great week!