A More Optimistic Fed: March 15 – 19

The Fed sees a brighter future, but the weather stifled on activity in February. Here are the five things we learned from U.S. economic data released during the week ending March 19.

FOMC stays the course but upwardly revises its economic forecast. The policy statement released following this past week’s meeting of the Federal Open Market Committee largely matched that from its last meeting. The statement noted that economic activity and employment measures “have turned up in recent months” but that many sectors “remain weak” and that inflation continues to be below its two-percent target. As expected, the committee voted unanimously to keep the fed funds target rate near zero percent and continue the Fed’s program of purchasing Treasury and agency mortgage-backed securities. 

Released simultaneously were the FOMC members’ economic projections, which presented a more optimistic picture for 2021 and beyond. The median forecast for 2021 economic growth as the U.S. economy expanding 6.5 percent, well above the prior median forecast of +4.2 percent. Similarly, the median prediction of the year-end unemployment rate of 4.5 percent compares favorably to the previous projection of 5.0 percent. The same group anticipates an unemployment rate of 3.9 percent at the end of 2022 and 3.5 percent at the end of 2023. Group members also see a bit more inflation in the economy, with a median prediction for core inflation of +2.2 percent for this year and +2.0 percent in 2023.

Retail sales came back down to earth in February (but remained ahead of year-ago levels). The Census Bureau estimates retail and food services sales fell 3.0 percent during the month to a seasonally adjusted $561.7 billion. The decline had followed an economic stimulus-fueled 7.6 percent surge in sales in January and left retail sales up 6.3 percent from a year earlier. Sales fell 4.2 percent at auto dealers/parts stores but rose 3.6 percent at gas stations (think prices at the pump). Net of both, core retail sales fell 3.3 percent for the month but were a robust 6.0 percent ahead of their February 2020 pace. During the month, sales fell at retailers focused on sporting goods/hobbies (-7.5 percent), furniture (-3.8 percent), apparel (-2.8 percent), electronics (-1.9 percent), and health/personal care (-1.3 percent). Also reporting declines were department stores (-8.4 percent), internet retailers (-5.4 percent), and restaurants/bars (-2.5 percent).

Forward-looking economic measures continued to suggest a robust rebound in 2021. The Conference Board’s Leading Economic Index (LEI) grew 0.5 percent in February, matching its January increase and up slightly from a 0.4 percent bounce in December. Even after rising consistently since late spring, the LEI remained 1.3 percent below its year-ago mark. Six of ten LEI components positively contributed to the index, led by jobless claims, new manufacturing orders, and the interest rate spread. The coincident index slipped 0.1 percent in February and was off 4.1 percent from its year-ago pace. Three of four coincident index components made positive contributions, led by nonfarm payrolls. The lagging index inched up 0.2 percent in February but was 4.0 percent off from its February 2020 reading. The Conference Board expects the U.S. economy will expand 5.5 percent this year.

Manufacturing activity struggled with February’s winter weather. The Federal Reserve estimates manufacturing output fell a seasonally adjusted 3.1 percent during the month following a 1.2 percent increase in January. The report noted that “some petroleum refineries, petrochemical facilities, and plastic resin plants suffered damage from the deep freeze and were offline for the rest of the month.” Durable and nondurable production fell 2.6 percent and 3.7 percent, respectively. Overall industrial production dropped 2.2 percent in February, its first decline since last September. Mining output dropped 5.4 percent while utility output surged 7.4 percent. Relative to February 2020 levels, manufacturing output and industrial production fell 4.1 percent and 4.2 percent, respectively.

The weather also cooled off housing starts in February. The Census Bureau reports that housing starts plummeted 10.3 percent during the month to a seasonally adjusted annualized rate (SAAR) of 1.421 million homes. Starts were 9.3 percent below their year-ago pace. Single-family homes starts slumped 8.4 percent in February (but remained up 0.6 percent from a year earlier), while multi-family starts fell 14.5 percent (and were off 27.6 percent from the year-ago pace). Looking towards the future, there were fewer building permits issued—permits fell 10.8 percent for the month to an annualized 1.682 million. Even with the decline, permits were up 17.0 percent from a year earlier. Home completions rose 2.9 percent in February to an annualized 1.362 million (+5.0 percent versus February 2020).

Other U.S. economic data released over the past week:

• Jobless Claims (Week ending March 13, First-Time Claims, seasonally adjusted): 770,000, +45,000 vs. the previous week, +488,000 vs. the same week a year earlier). 4-week moving average: 746,250 (+221.0% vs. the same week a year earlier).
• Import Prices (February 2021, All Imports): +1.3% vs. January 2021, +3.0% vs. February 2020. Nonfuel Imports: +0.4% vs. January 2021, +2.8% vs. February 2020.
• Export Prices (February 2021, All Exports): +1.6% vs. January 2021, +5.2% vs. February 2020. Nonagricultural Exports: +1.5% vs. January 2021, +4.1% vs. February 2020.
• Housing Market Index (March 2021, Index (>50=More Homebuilders View Housing Market As “Good” Versus Being “Poor,” seasonally adjusted): 82 (February 2021: 84, March 2020: 72).
• State Employment (January 2021, Nonfarm Payrolls, seasonally adjusted): Increased in 20 states, decreased in 2 states, and essentially held steady in 28 states and the District of Columbia compared to December 2020. Decreased in 48 states and the District of Columba and essentially held steady in 2 states compared to January 2020.
• Business Inventories (January 2021, Manufacturers’ and Trade Inventories, seasonally adjusted): $1.982 trillion (+0.3% vs. December 2020, -1.8% vs. January 2020).

The opinions expressed here are not necessarily those of Kevin’s current employer. No endorsements are implied.