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Retail Sales Increase

Overview: Mortgage markets were in a bit of a holding pattern over the past week with relatively little daily movement. This is not surprising since the major economic data was close to the expected levels. In addition, investors are carefully monitoring the debt ceiling talks, and no one is certain what impact a failure to reach an agreement would have on mortgage rates.


Since consumer spending accounts for over two-thirds of U.S. economic activity, investors and Federal Reserve officials watch retail sales data very closely. On the one hand, strong wage gains and low levels of unemployment support additional spending. On the other hand, high inflation and economic uncertainty due to Fed tightening and bank troubles are causing consumers to be more selective and price conscious. With these conflicting influences in place, retail sales in April rose a moderate 0.4% from March, below the consensus forecast, but the shortfall was fully offset by an upward revision to the March results. In general, consumers spent more on necessities such as groceries, while cutting back on more discretionary items such as furniture and sporting goods.

Given the persistent shortage of available homes, there is a tremendous opportunity for builders to provide additional supply. The latest reports suggest that they are responding, although perhaps not as quickly as one might hope. In April, total housing starts increased 2% from March, matching expectations, but still were 22% lower than a year ago. Encouragingly, single-family housing starts rose to the highest level this year. Similarly, single-family building permits, a leading indicator, increased to the best level in seven months.

Beyond the housing starts data, the latest survey of home builder sentiment from the National Association of Home Builders (NAHB) rose far more than expected to the highest reading since July 2022. Due to the relatively tiny number of existing homes available for sale, the chief economist of the NAHB pointed out that new homes represent over 30% of current housing inventory, far above the levels around 12% typically seen under normal market conditions. Builders reported that high costs for land, labor, and materials, as well as tighter lending standards for construction loans, were obstacles to a faster pace of building.


Retail Sales (% change)

Week Ahead

Looking ahead, investors will continue to watch for progress in the debt ceiling talks, signs of problems in additional banks or other areas of the financial system, and comments from Fed officials on the outlook for future monetary policy. For economic reports, the Existing-Home Sales report will be released on May 18 and the New-Home Sales report on May 23. Personal Income and Outlays and the Personal Consumption Expenditures (PCE) Price Index, the inflation indicator favored by the Fed, will come out on May 26.


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