Market Perspective

Solid Consumer Spending


Overview: Over the past week, stronger than expected consumer spending data and tough talk on inflation from the Federal Reserve were mildly negative for mortgage markets. The daily movements continued to be large, but were mostly offsetting, and rates ended the week just a little higher.

 

Since consumer spending accounts for over two-thirds of U.S. economic activity, it is an important indicator of the health of the economy. In April, retail sales increased 0.9% from March, which was close to expectations, but the results for March were revised significantly higher. Overall sales were an impressive 8% higher than a year ago. Recovering from the pandemic, bar and restaurant sales posted another month of strong gains and were 20% higher than last year at this time. Despite rising prices, consumer spending has remained very strong.

Home buyers desperately need more inventory in many regions, but the most recent data on housing starts was somewhat disappointing. In April, overall housing starts fell slightly from March to weaker than expected levels. Single-family starts declined 7% from March, but remained well above the levels seen prior to the pandemic. The number of single-family units under construction rose to 815,000, the most since 2006. The obstacles to construction seen in recent months remained the same, including higher prices and shortages for land, materials, and skilled labor.


During a speech on Tuesday, Fed Chair Powell emphatically stated that the Fed will do whatever it takes to bring down inflation, which is running at a 40-year high. He said that they will continue to raise the federal funds rate as high as needed, even if it slows economic growth. He also warned that the monetary policy tightening could cause the unemployment rate to increase.

 

Retail Sales (% change)

 

Week Ahead


May 19 — Existing-Home Sales report

May 24 — New-Home Sales report

May 27 — Core Personal Consumption Expenditures (PCE) Price Index