The views and opinions expressed in this post are solely those of the author and do not necessarily reflect the views of the Georgia Institute of Technology or the Georgia Board of Regents.
I couldn’t help myself. Despite traveling all week, and technically being on vacation today at a romantic mountain inn with my wonderful wife, I had to put out an update. There was just too much data out this week to ignore. But commentary will be limited….otherwise, my wonderful wife may kill me.
Consumer Price Index
As I have been saying, inflation is not under control…and the January reading of the CPI confirms it. CPI came in at 3.1% year-over-year (YoY), much hotter than economists expected. Core CPI (CPI less food and energy) dropped below 4.0% for the first time since May 2021. However, it also was much higher than economists expected, and on a month-over-month (MoM) basis, it rose 0.4%…the highest monthly jump since April.
But the biggest news was in the measure known as “Super Core” (CPI Services less shelter). Super core inflation exploded 0.7% MoM (the biggest monthly jump since Sept. 2022) raising the YoY rate to 4.4%. Clearly, services inflation is moving in the wrong direction. With services being such a large part of the U.S. economy, this move in service prices will continue to put pressure on the consumer, and is going to give the Fed even more reason to pause any consideration of rates cuts. In fact, if inflation continues the rising trend, rate INCREASES may even slip back into the conversation. It seems clear that any rate cuts are certainly off the table for the next several months.
Speaking of the trend, as I have pointed out in the past, inflation tends to come in waves, and this current wave looks a lot like the inflation of the 1970s. The January CPI reading continues that trend.
Producer Price Index
And it isn’t just consumer prices moving in the wrong direction. Producer prices rose in January at the fastest rate in 5 months! Economists expected a 0.1% jump in wholesale costs in January. Instead, the PPI jumped 0.3% Core wholesale prices (wholesale costs excluding food, energy, and trade margins) rose even more at a 0.6% pace last month. Services inflation is also re-accelerating, rising 0.6% for the month.
Why is this important? Because inflation tends to hit at the wholesale level first, and then spill over to consumers. Clearly, inflation is not moving in the direction of the Fed’s target as smoothly as they would like.
Retail Sales
If the CPI and PPI reports came in “hot”, the retail sales report was anything but. Retail sales plunged in January, down 0.8% from December. (And yes, the numbers are seasonally adjusted so the effect of Christmas is removed.) Expectations were for a modest decline of only 0.2%. If you remove motor vehicles, the monthly drop was 0.6%. Consumers clearly stopped and took a breath in January. It may have been the poor weather. It may also have been the first bills coming in from all the “buy now-pay later” options that were taken during the Christmas season!
On an annual basis, January retail sales were up only 0.6% from last January. That is the slowest year-over-year growth since May 2020. Given that inflation is running more than 3% year-over-year, that means that in real terms, retail sales were actually down about 2.4%. In fact, real retail sales have declined for 11 of the last 15 months. So while consumers are spending and increasing their level of debt, they are actually buy less stuff! Digging deeper into the report, we find that since last January, consumers have purchased far less furniture, home appliances, and building materials, but are spending more on personal care products, eating out, and making purchases online.
Wages aren’t keeping up with inflation; the number of households with multiple jobs for economic reasons is up; and last week we saw that growth in consumer credit slowed dramatically. Is January the beginning of a slowdown in household consumption? If I had to bet, I would say “no.” The only two things that will stop the U.S. consumer from spending are 1) they run out of money and 2) they run out of available credit. And as we saw last week, they still have a lot of available credit!
Home Builder Confidence
For the third month in a row, home-builder confidence rose in February mostly driven by the expectation of a Fed rate cut, and a corresponding drop in mortgage rates in the near future. However, given the inflation data we got this week, those expectations are not well founded. In fact, Thursday we learned from Fannie Mae that the average 30-year mortgage rate moved up nearly 10 basis points this week to 6.77%. As the realization that there is likely not going to be a rate cut in May begins to set in, it will be interesting to see how builder confidence changes in the coming months. But for now, builders said they were pulling back on incentives and home price cuts to increase sales. Only 25% of builders said they cut prices in February, down from 31% in January. All three sub-indices rose, including “traffic of prospective buyers” as the spring buying season gets ready to ramp up.
Housing Starts and Building Permits
Housing starts fell sharply in January to an annual rate of 1.33 million units, far less than the 1.56 million units started in December, and far less than the 1.45 million units that were expected. This sharp decline gets us back to near post-COVID lows. Single-family starts were down about 5% from December. However, multi-family starts dropped 24% to their lowest level since May of 2020 when the economy was essentially shut down! And this time, we can’t blame the weather. Building is often slow in January and that should already be baked into the seasonal adjustment factors.
Not only are multi-family starts way down, so are multi-family building permits. Single-family building permits rose slightly, but multi-family permits dropped to their lowest level since late 2020. The biggest drop was in permits for housing with 5+ units.
Industrial Production
Overall industrial production in the U.S. fell 0.1% in January, and manufacturing alone fell 0.5%. Excluding motor vehicles, manufacturing fell 0.6%. Given the bad weather, and the decline in weekly hours worked posted in the January jobs report, a soft number was expected, but industrial production fell even further, as the Fed’s interest rate cuts have been having an effect on the overall economy. The capacity utilization rate (which reflects the limits to operating the nation’s industrial infrastructure) fell to 78.5% in January.
Consumer Sentiment
So finally, after all this rough data, this morning we got the preliminary consumer sentiment number for February from the University of Michigan. After two months of consumer’s feelings about the current situation, and future expectations rising sharply, in February, they cooled off. There was a very slight decline in how consumers feel about the present situation, and a slight increase in their feelings about the future. This is mostly due to the fact that their expectations about inflation five years from now are still below 3%, but their feelings about inflation one year out is starting to rise slightly. This isn’t surprising given what we saw in all the inflation data released this week.
