It’s Friday and that means it’s time to review the latest economic data and identify which pockets of the economy are heating up and which are slowing down. Don’t worry about catching every headline and every report throughout the week—I recap all of the most important news impacting your wealth right here every Friday. Let’s take a look at this week’s big headlines…
On Friday, the University of Michigan’s Consumer Sentiment Index showed that U.S. consumer sentiment jumped 4.4% to 99.9 in February, up from a 95.7 reading in January. This marks the second-highest level since 2004 and surpassed economists’ expectations for a reading of 95.5.
Despite the recent stock market correction, it appears that consumers are focusing their attention on current economic conditions; the current conditions index rose 4% from 110.5 in January to 115.1 in February. Only 6% of participants cited the recent stock market volatility when asked to identify any recent economic news they had heard.
Overall, the result is a welcome change of pace from the weakening numbers we’d observed over the past few months. So, it appears that consumers’ optimism about the present economic picture has brightened.
Housing Starts and Building Permits
Friday’s housing starts report brought stronger-than-expected numbers. The Commerce Department reported that housing starts surged 9.7% to an annual pace of 1.326 million housing units in January, the highest level in over a year. January’s pace exceeded economists’ forecasts, which looked for housing starts to rise to a pace of 1.234 million units. Housing starts were largely buoyed by single-family homebuilding, which increased 3.7% to a rate of 877,000 units.
Building permits for single-family homebuilding jumped 7.4% to a rate of 1.396 million units, from December’s rate of 1.300 million units. This represents the largest surge since June 2007.
If you recall, I’ve been explaining how this winter’s record cold temperatures were likely impacting housing numbers, which had been weak in recent reports. It is clear that as the weather moderates and homebuilders and shoppers alike resume their activities, both construction and demand is rebounding.
While this was a strong report, I will be keeping a close eye on housing numbers as mortgage rates and housing prices continue to increase.
On Thursday, the Federal Reserve reported that industrial production inched 0.1% lower in January, ending four consecutive months of growth. Economists were looking for industrial production to climb about 0.3% higher. Manufacturing output has been largely flat since October, rising just 0.1% from December to January. Capacity utilization—a gauge for how much slack may be in the economy—dipped from 77.7% in December to 77.5% in January. Utilities output jumped 0.6% last month.
All-in-all, while this report is a little lukewarm, total industrial production for January is 3.7% higher than it was a year earlier. So an economic recovery in the industrial economy remains evident.
Consumer Price Index
According to Wednesday’s report from the Labor Department, the Consumer Price Index (CPI) surged 0.5% in January, topping economists’ expectations for a 0.3% increase. Excluding food and energy, core CPI rose 0.3% in January, slightly higher than estimates for 0.2%. In the past 12 months, core CPI has climbed 1.8%, topping economists’ median estimate for 1.7%.
Because January’s prices indicate that inflation is gaining momentum on the consumer level, Wall Street’s inflation fears—which were awakened earlier this month following the wage inflation observed in the last jobs report—continue to grow. This fear sent the stock market tumbling and Treasury yields higher in Wednesday’s early morning trading hours. However, investors quickly realized that inflation remains a good distance from the Federal Reserve’s 2% target. So the stock market subsequently retraced its steps.
Now, if inflation continues on this upward trajectory, and Treasury yields continue to rise, then the Fed will have to raise key interest rates. In his ceremonial swearing-in this past Tuesday, new Fed Chair Jerome H. Powell’s remarks suggest that the Fed could proceed with gradual rate hikes this year. Chair Powell noted that “We are in the process of gradually normalizing both interest rate policy and our balance sheet…sustaining the pursuit of our objectives.”
Overall, the next key interest rate hike by the Fed could be as early as March. We’ll have to wait and see what happens in the Federal Open Market Committee’s (FOMC) March 20 meeting.
In Wednesday’s report from the Commerce Department, retail sales declined 0.3% in January, missing economists’ estimates for a 0.2% increase and marking the sharpest drop in almost one year. January’s numbers came in 3.6% higher on an annual basis.
Core retail sales, which exclude automobiles, gasoline, building materials and food services, remained unchanged from December, recording a 0.2% decline. Decreased sales were seen across furniture, health and personal care stores. Peeling back the layers, consumers are continuing to spend money in certain areas. Gas sales jumped 1.3%, clothing sales rose 1.2% and department store sales ticked 0.8% higher.
Because retail sales are a good indicator of broad consumer spending patterns, it appears that the consumer’s energy from the holiday season has cooled. Additionally, declining retail sales could put a damper on annual GDP growth.
Wednesday’s business inventories report from the Commerce Department revealed that U.S. business inventories climbed in 0.4% in December. Inventory levels are estimated to total $1,902.2 billion, compared to the revised $1,895.1 billion reading in November. Economists were expecting inventories to rise 0.3% in December. Retail inventories, which strip out autos, increased 0.2%, in-line with the reading from November. Also, business sales rose 0.6%. At December’s sales pace, it would take 1.33 months to empty the shelves, consistent with November.
Overall, both the retail and business inventories numbers indicate that we’re starting to see weak sales lead to a buildup in inventory. This report can also impact the GDP outlook. So we’ll see what type of effect inventories may have on GDP in the Commerce Department’s first estimate for fourth-quarter GDP growth later this month.
That’s all I have for you this week. I’ll be in touch again next week with the latest ratings out of Portfolio Grader.
Until next week,