Dovish Powell; economy emerging from hibernation - Capital Economics
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Dovish Powell; economy emerging from hibernation

US Economics Weekly
Written by Michael Pearce
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With fiscal negotiations taking a backseat to the impeachment trial in the Senate, a dovish Powell speech took the limelight this week, together with signs that virus restrictions will continue to be lifted.

With fiscal negotiations taking a backseat to the impeachment trial in the Senate, a dovish Powell speech took the limelight this week, together with signs that virus restrictions will continue to be lifted.

Dovish Powell

Fed Chair Jerome Powell’s use of a new phrase in a speech to the Economic Club of New York this week, pledging to be “patiently accommodative”, is yet another sign that the Fed has no intention of raising rates or trimming the size of its asset purchases any time soon. His speech titled “Getting back to a strong labour market” sounded dovish throughout. It was interesting to hear Powell describe “economic disparities that were already too wide have widened further” – perhaps suggesting that even getting back to February 2020 conditions in the labour market would not necessarily be enough to satisfy the Fed’s broad-based and inclusive employment goal.

We also learnt this week that several senior White House officials are backing Michigan State Professor Lisa D Cook as a potential nominee to fill the vacant Board seat at the Fed. While her research does not focus on monetary policy, past writings suggest that she would be another voice supporting the Fed’s shift to emphasising shortfalls on the employment side of the mandate.

All that adds to the impression that the Fed will remain very dovish even as economic activity and inflation begin to pick up more markedly later this year. Officials have been stressing that they will regard any pick-up in inflation once the economy reopens as transient and are making it clear that labour market conditions are a very long way from even justifying talk of tightening monetary policy.

Economy emerging from hibernation

The other notable development this week is just how quickly new COVID-19 infections and hospitalisations have continued to decline across the country. With pressure easing on healthcare systems, moves to loosen restrictions have continued, with New York City reopening indoor dining today, and New York State planning to allow 10% capacity at stadiums and arenas later this month. Loosening restrictions are already helping to feed through to a recovery in the most virus-sensitive sectors, especially travel, leisure & hospitality. (See Chart 1.)

Chart 1: High-Frequency Consump’n Indicators (% y/y)

Sources: Eikon, OpenTable, STR

The risk is that reopening drives a fourth wave of infections before the vaccination program has reached critical mass. But the news on that front has been upbeat. Unlike in Europe, there are no signs of production constraints slowing supply, with the US now administering 1.6 million doses daily. (See Chart 2.) That pace should continue to accelerate as manufacturing ramps up, even before additional vaccines are approved, with the FDA decision on the Johnson & Johnson vaccine just a few weeks away.

Chart 2: COVID-19 Vaccination Progress

Source: CDC

The week ahead

In a holiday shortened week, we expect to learn that retail sales rose in January for the first time since September, while industrial production probably posted another small gain last month.


Data Previews

Retail Sales (Jan.) 08.30 Wed. 17th Feb.

Forecasts

Previous

Median

Capital Economics

Retail Sales

-0.7%

+0.7%

+1.2%

Core Retail Sales (Less Autos)

-1.4%

+0.8%

+1.0%

Soft patch in consumption ending

The 1.2% m/m rebound in retail sales we expect in January is partly due to a price-related increase in gasoline sales, but we think underlying control group and food services spending also picked up for the first time since September.

Gasoline prices rose by a seasonally-adjusted 7.1% last month which means that, even accounting for a small fall in real gasoline consumption, the retail value of gas station sales should still be up by around 5% in January. The manufacturers’ data point to another increase in auto sales in January. We also expect a turnaround in discretionary spending in the January data. Stimulus cheques hit most Americans’ bank accounts in early January, and new infection numbers fell throughout the month in most States. A range of high-frequency indicators, including card transaction data, suggest that spending has begun to stabilise or even edge up again. (See Chart 3.)

As a result, we are pencilling in small gains in food service sales and a 0.5% rise in control group sales, which, together with the surge in gasoline sales, would leave total retail sales up by 1.2%.

Chart 3: Food Service Retail Sales & Card Transactions (% y/y)

Sources: Refinitiv, BEA

Industrial Production (Jan.) 09.15 Wed. 17th Feb.

Forecasts

Previous

Median

Capital Economics

Industrial Production

+1.6%

+0.4%

+0.2%

Manufacturing Output

+0.9%

+0.4%

Manufacturing recovery still lagging

We estimate that manufacturing output only inched up in January, which would be disappointing given output is a few percent below pre-pandemic levels.

The surprise decline in manufacturing payrolls last month suggests the sector has lost some momentum, though a rise in average hours means that total hours worked still increased, consistent with a 0.4% m/m rise in manufacturing output. (See Chart 4.) The survey evidence remains upbeat, suggesting the softness in January is likely to be temporary – perhaps linked to reports of semi-conductor shortages at auto plants and global shipping delays – rather than anything more longer lasting.

Elsewhere, the electricity output data point to a drop back in utilities output, reflecting the unseasonably warm weather in January. Oil and gas output was little changed last month, though the continued rebound in drilling rig numbers bodes well for mining output further ahead. We expect industrial production rose by a more modest 0.2% last month.

Chart 4: Manu. Hours Worked & Output (%m/m)

Source: Refinitiv

NAHB Index/Housing Starts (Feb./Jan.) 10.00/08.30 Wed. 17th/Thur. 18th Feb.

Forecasts

Previous

Consensus

Capital Economics

NAHB Index

83

83

80

Housing Starts (000s, Annualised)

1,669

1,653

1,620

Moderating demand to put the brake on soaring starts

The breakneck pace of housing starts seen since the middle of last year means builders are running up against numerous production constraints, and as a result we expect that single-family starts eased back to 1.3m annualised in January.

Rising mortgage interest rates will also help moderate housing demand this year. Indeed, new home sales have dropped 14% since their peak in July last year, and that points to a small fall in starts over the next few months. (See Chart 5.) Combined with surging lumber prices, that helps explain the slight dip in homebuilder confidence in December and January. We expect another small fall to 80 in February.

A large pipeline means developers are likely to be cautious about breaking ground on new multifamily projects. We expect starts dropped back to 320,000 annualised, leaving total starts at 1.62m.

Chart 5: New Home Sales & SF Starts (000s Ann.)

Source: Refinitiv

Fed FOMC Minutes (26th – 27th Jan. Meeting) 14.00 Wed. 17th Feb.

Minutes to underline dovish consensus

The minutes from the Fed’s January meeting are likely to underline that those officials already talking about tightening policy are firmly in the minority on the FOMC.

Last month’s meeting was a low-key affair, with the only notable change to the policy statement being the removal of a previous line saying that the pandemic posed “considerable risks to the economic outlook over the medium term”. Chair Jerome Powell confirmed that reflected an upgrade to officials’ assessment of the outlook, largely driven by the accelerating vaccine rollout. Alongside the likelihood of significant further fiscal stimulus, that has prompted some regional Fed Presidents to speculate that the Fed could start to wind-down its asset purchases before too long. The minutes will no doubt provide more details of that discussion, but are likely to underline the majority’s view that it is still too soon to even begin thinking about withdrawing policy support.

Otherwise, we will be looking out for any discussion of the continued surge in market-based breakeven inflation compensation, which has been the main driver of the recent rise in longer-term Treasury yields. It’s still debatable the extent to which that has been driven by the Fed’s new commitment to allowing inflation to overshoot the 2% target, or if it’s simply a result of the recent rebound in crude oil prices. Either way, with the Fed having spent most of the past several years worrying that inflation expectations were too low, we suspect the apparent rebound will be seen as a welcome development.


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Release/Indicator/Event

Time EST (GMT-5)

Previous*

Median*

CE Forecasts*

Mon 15th

Presidents’ Day Holiday – Markets Closed

Tue 16th

Empire State Manufacturing Index (Feb)

08.30

+3.5

+5.0

+8.0

Wed 17th

Producer Prices (Jan)

08.30

+0.3%(+0.8%)

+0.4%(+0.8%)

+0.6%

Core Producer Prices (Jan)

08.30

+0.1%(+1.2%)

+0.2%

+0.3%

Retail Sales (Jan)

08.30

-0.7%

+0.7%

+1.2%

Core Retail Sales (Jan)

08.30

-1.4%

+0.8%

+1.0%

Control Group Retail Sales (Jan)

08.30

-1.9%

+0.4%

+0.5%

Industrial Production (Jan)

09.15

+1.6%

+0.4%

+0.2%

Capacity Utilisation (Jan)

09.15

74.5%

74.8%

74.6%

Manufacturing Output (Jan)

09.15

+0.9%

+0.4%

NAHB Housing Market Index (Feb)

10.00

83

83

80

Business Inventories (Dec)

10.00

+0.5%

+0.4%

+0.5%

Fed FOMC Minutes (27th Jan)

14.00

Thu 18th

Housing Starts (Jan)

08.30

1,669,000

1,653,000

1,620,000

Initial Jobless Claims (w/e 13th Feb)

08.30

793,000

Philly Fed Manufacturing Index (Feb)

08.30

+26.5

+22.0

+20.0

Fri 19th

Markit Manufacturing PMI (Feb)

09.45

59.2

Markit Services PMI (Feb)

09.45

58.3

Existing Home Sales (Jan)

10.00

6,760,000

6,550,000

Selected future data releases and events

23rd Feb

President Biden State of the Union Speech

25th Feb

GDP (Q4, 2nd Est.)

08.30

Durable Goods Orders (Jan)

08.30

26th Feb

Personal Income & Spending (Jan)

08.30

17th Mar

Fed Policy Announcement

14.00

*m/m(y/y) unless otherwise stated

Sources: Bloomberg, Capital Economics

Main Economic & Market Forecasts

%q/q ann. (%y/y) unless stated

Q4 2020

Q1 2021

Q2 2021

Q3 2021

Q4 2021

Q1 2022

2020

2021

2022

GDP

+4.0

+6.0

+11.0

+4.2

+4.2

+3.4

(-3.5)

(+6.5)

(+4.0)

CPI Inflation

(+1.2)

(+1.7)

(+3.3)

(+2.5)

(+2.4)

(+2.4)

(+1.3)

(+2.5)

(+2.3)

Core CPI Inflation

(+1.6)

(+1.8)

(+2.8)

(+2.3)

(+2.2)

(+2.2)

(+1.7)

(+2.3)

(+2.2)

Unemp. Rate (%), Period Ave.

6.8

6.4

5.1

4.8

4.5

4.4

8.1

5.2

4.4

Fed Funds Rate, End Period (%)

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

10y Treas. Yld., End Period (%)

0.93

1.15

1.25

1.35

1.50

1.55

0.93

1.50

1.75

S&P 500, End Period

3756

3900

4000

4100

4200

4300

3756

4200

4500

$/€, End Period

1.22

1.22

1.23

1.24

1.25

1.25

1.22

1.25

1.25

¥/$, End Period

103

103

102

101

100

100

103

100

100

Sources: Refinitiv, Capital Economics


Michael Pearce, Senior US Economist, +1 646 583 3163, michael.pearce@capitaleconomics.com