Manufacturing Output Recovers to Pre-Pandemic Levels as Housing Starts, Retail Sales Slide

Key Takeaways:

• The minutes from the Federal Open Market Committee’s (FOMC) July 27-28 meeting indicated that “provided that the economy were to evolve broadly as they anticipated,” most participants “judged that it could be appropriate to start reducing the pace of asset purchases this year.” Most participants supported reducing the purchases of Treasury securities and MBS “proportionally,” but the pace itself is still in question. “Many” officials expressed a desire for bond-buying to end before interest rate hikes may be necessary, while other officials advocated for a more gradual approach. Still, many officials reiterated that an eventual increase in the federal funds rate is not mechanically linked to the timing of tapering.
• Housing starts fell 7.0 percent to a seasonally adjusted annualized rate (SAAR) of 1.53 million in July, the slowest pace since April but still about 25 percent higher than July 2019, according to the Census Bureau. Single-family starts dropped 4.5 percent to a SAAR of 1.11 million, while multi-family starts declined 13.1 percent to a SAAR of 423,000. Single-family permits decreased 1.7 percent to a SAAR of 1.05 million, the slowest pace since July 2020, while multi-family permits jumped 11.2 percent to a SAAR of 587,000, the fastest pace since January.
• The National Association of Home Builders/Wells Fargo Housing Market Index fell 5 points to 75 in July, the lowest level since July 2020. A reading above 50 indicates that more builders view the single-family market as “good” rather than “poor.” The traffic of prospective buyers dropped 5 points to 60. The index for present sales declined 5 points to 81, while the index for sales in the next six months held steady at 81. The press release cited “higher construction cost and supply shortages along with the rising home prices,” the latter of which is reportedly causing “sticker shock” among prospective buyers, as drivers for the decrease in builder confidence.
• Retail sales and food services fell 1.1 percent in July, according to the Census Bureau. Sales at food services and drinking places increased 1.7 percent, the fifth straight monthly increase but the slowest acceleration over that period. Sales of motor vehicles and parts dropped 3.9 percent, third straight monthly decline, while building material sales were down 1.2 percent, the fourth straight monthly decline. Core retail sales (excluding food services, autos, building supplies, and gas stations) also declined 1.0 percent, though June’s estimate was revised upward three-tenths to a 1.4 percent gain. Nonstore sales dropped 3.1 percent, the largest decline since February.
• Industrial production, a gauge of output in the manufacturing, utility, and mining sectors, rose 0.9 percent in July to 101.1, the largest increase since March, according to the Federal Reserve Board. Manufacturing output exceeded the pre-pandemic levels seen in February 2020 for the first time, increasing 1.4 percent over the month as motor vehicle and parts production jumped 11.2 percent. Mining output increased 1.2 percent, while utilities output fell 2.1 percent.

Forecast Impact:

The decline in housing starts was somewhat larger than expected but generally in line with our expectation that housing starts will remain soft in Q3 as builders continue to grapple with supply and labor constraints. Given the disappointing starts number and a decrease in the less volatile single-family permits number, we will likely downgrade slightly our Q3 forecast of single-family starts. However, this may be partially offset by an upgrade to our near-term multifamily starts forecast, as multifamily permits jumped amid low rental vacancy rates and high rent growth across most of the country. Further, we continue to believe that homebuilders are progressing through their backlog of orders and will begin accepting new orders soon. This view is supported by the number of single-family units currently under construction reaching their highest level since mid-2007. We expect single family starts to remain elevated through 2022 as homebuilders work to catch up with years of pent-up demand due to underbuilding.

The decline in retail sales was larger than expected but may reflect unusual seasonal patterns. Excluding motor vehicle and parts sales, which have been affected by ongoing semiconductor shortages, and nonstore sales, which represent predominantly e-commerce business and were likely affected by Amazon Prime Day taking place in June instead of July as is typical, headline retail sales would have seen an increase of 0.2 percent in July. We expect modest retail sales growth going forward as consumption continues to shift away from goods and into services, though recent COVID developments present a risk to this outlook. The continued increase in spending at restaurants and bars is encouraging. However, some high frequency indicators are beginning to point to a modest pullback in certain service activities. The increase in manufacturing output, which now exceeds pre-pandemic levels, is also in line with our forecast as we expect businesses to replenish their depleted inventories. However, the dramatic increase in motor vehicle and parts production could be a seasonal anomaly, as car manufacturers usually idle plants this time of year to retool, a pattern that may be distorted because many plants have already been idled due to the semiconductor shortage. On balance, our GDP forecast is unlikely to be meaningfully affected by the retail sales or industrial production readings.

Nathaniel Drake and Rebekah Gutierrez
Economic and Strategic Research Group
August 20, 2021

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