MARCH 19, 2010
February Retail Sales Increase Despite Bad Weather
Retail sales increased 0.3 percent in February despite severe winter weather that crippled several areas of the country. Sales growth was relatively broad with 10 of the 13 industry sectors tracked experiencing improvement. Sectors that are usually heavily affected by bad weather, such as restaurants and building supply stores, actually posted gains during the month.
February’s gain was the fourth in five months, a welcome development given that consumer spending was not projected to contribute heavily to the economic recovery.
Despite the sales improvement, there are some reasons for concern. January’s gain was revised downward from 0.5 percent to 0.1 percent. Some economists believe February’s figures also could be revised downward once a larger sampling of retailers is surveyed. Two more areas of concern are the labor market, which is still sluggish, and consumers’ household budgets, which are still tight. This will dampen consumer spending until the labor market improves.
Industrial Production Posts Eighth Straight Monthly Increase
Industrial production increased in February by 0.1 percent, after a 0.9-percent rise in January. Manufacturing, which accounts for approximately four-fifths of the industrial production report, declined 0.2 percent. The overall index rose more than forecast by Wall Street economists, who were expecting the index to remain unchanged.
Expansion in manufacturing is being driven by a mix of demand growth and a positive but diminishing contribution from inventories. Even though industrial production has been on the rise in recent months, growth has slowed considerably. Production will likely show improvement in March, however, as manufacturers will probably make up for the disruptions caused by the severe weather in February.
Capacity utilization rose to 72.7 percent, the highest level since December 2008 but still below the 79-percent level before the start of the recession. The Federal Reserve is carefully watching this indicator as a measure of how much slack is available in the economy. As utilization rises, capacity will be reduced, which could lead to higher prices and ultimately result in the Fed raising interest rates. Economists continue to forecast a moderate economic expansion and recovery throughout the year.
U.S. Trade Gap Shrinks Unexpectedly
The U.S. trade deficit fell to $37.3 billion in January from a revised $39.9 billion deficit in December as a decline in imports outpaced the fall in exports. Exports of goods and services fell 0.3 percent, their first decline since April 2009. The drop in exports was more than offset by weaker domestic demand, as imports tumbled 1.7 percent—the first drop since August 2009. The biggest movement in January’s trade deficit figures related to the automotive sector, which saw exports fall 5.7 percent and imports decline 8 percent.
Despite January’s drop in imports and exports, the overall trend in international trade and investment recently has been one of growth. Domestic and foreign investment will be key drivers in the global economic recovery since consumers are not expected to lead the charge in this recovery.
NAHB: Housing Weakness Remains
The National Association of Home Builders’ (NAHB) index of builder confidence fell 2 points in March to 15. Readings below 50 indicate negative sentiment about the market. The last time the index was above 50 was in April 2006.
March’s decline marked the fourth drop in the index in six months as bad weather halted building last month in many parts of the East and Midwest. All three components of the index—present sales, expected six-month sales and prospective buyers’ traffic—fell in March. The steepest decline was for prospective buyers’ traffic, which dropped 16.7 percent.
Many buyers are passing up new homes in favor of cheaper used homes. Foreclosures throughout the country are depressing the prices of used sales inventories. Obtaining credit continues to be tough for prospective buyers, and lower appraisal levels have kept many sellers on the sidelines. Experts forecast home sales will increase in the near term but will weaken again after federal tax credits expire at the end of April.
Housing Starts, Building Permits Fall
Housing starts fell 5.9 percent to a seasonally adjusted annual rate of 575,000 in February. Construction declined the most in the Northeast and South as record snow storms disrupted home building in these regions. New construction of multi-family homes plunged 30.3 percent while single-family home construction fell 0.6 percent. On a year-ago basis, new home construction is still up 0.2 percent this year. Building permits fell 1.6 percent to a rate of 612,000 in February. This is the second consecutive month of decline for permits, signaling dwindling demand.