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…
Consumer Price Index
On Monday, the Labor Department revealed that the Consumer Price Index (CPI) increased 0.2% in February, which was in-line with economists’ forecasts. Stripping out food and energy, core CPI ticked 0.2% higher for the month. In the past 12 months, CPI has risen 2.2%, and core CPI has climbed 1.8% higher.
Digging into the details, it appears that both the apparel and motor vehicle insurance index, which increased 1.5% and 1.7% respectively in February, contributed to most of the gain in the CPI. However, moderating energy prices helped to keep inflation relatively contained. Specifically, decreases in gasoline and fuel oil prices cooled inflation off. February’s numbers follow January’s sharp uptick of 0.5%, which was the largest monthly gain in four years.
All-in-all, this report indicates that while inflation is not silent, it’s also not roaring. A great example is wage inflation, which has risen a modest 0.4% higher in the past 12 months. This report has made Wall Streeters—as well as myself—all but certain that the Federal Reserve will increase key interest rates by a quarter percent in next week’s Federal Open Market Committee (FOMC) meeting.
Keep in mind that if inflation continues to decelerate, we can expect the Fed to adopt a more dovish stance and in turn, take a more modest approach to future rate hikes.
The economic news that rattled Wall Street on Wednesday came from the Commerce Department, which announced that retail sales declined for the third-straight month in February. Slipping 0.1%, February’s retail sales fell significantly short of economists’ estimates for a 0.3% gain. The decline appears to have been driven largely by a drop in car and gas sales. Retail sales haven’t declined three months in a row since April 2012.
Now, there were pockets of strength in the report. Typically, when gas prices fall, it puts more money in consumers’ pockets, and they tend to spend that money elsewhere. So it’s not surprising that building material stores reported a 1.9% increase in sales in February, following a 1.7% drop in January. Core retail sales, which exclude vehicle and gasoline sales, as well as building materials and food services, actually inched 0.1% higher in February. Year-to-date, retail sales are running 4.0% higher than the same period in 2017. Also, January’s retail sales were revised to show sales faltering 0.1% versus the initial 0.3% decline reported.
However, this lackluster report gives the Fed another reason to hesitate about raising rates too much, too fast this year. The good news is that a slowdown in rate hikes will support the stock market. The bad news is that disappointing results like this could lead to lower estimates for first-quarter GDP growth.
On Wednesday, the Commerce Department also reported that U.S. business inventories jumped 0.6% in January. These results were consistent with economists’ expectations. Inventory levels are estimated to total $1,917.0 billion, compared to the revised $1,905.7 billion reading in December.
Retail inventories excluding automobiles, which factor into the calculation of GDP, grew 0.1%, softer than the 0.3% gain we saw in December. Notably, motor vehicle inventories surged 1.7% in January, rebounding from a 0.3% decrease in December. Business sales plummeted 0.2%, the most since July 2016.
At January’s sales pace, it would take 1.34 months to empty the shelves, up slightly from 1.33 months in December. So, we could see businesses ease off on production in the near term, in order to clear out their shelves a bit.
Housing Starts and Building Permits
In February, U.S. housing starts declined 7.0% to an annual rate of 1.236 million units. Economists had expected a less substantial drop to 1.290 million units. Housing starts have fallen 4% in the past 12 months. The good news is that January’s strong starts were revised even higher, from 1.326 million units to 1.377 million units. In the Commerce Departments’ Friday report, building permits for future homebuilding also retreated 5.7% to an annual rate of 1,298,000, which met economists’ expectations.
Peeling back the layers, it appears that multi-family housing, a volatile category, is the culprit that put an end to two consecutive months of gains in housing starts. Starts for multi-family housing plunged 26.1% to a rate of 334,000 units last month. This is the lowest level since September 2017. Plus, permits for the building of multi-family housing decreased 14.8% to a rate of 426,000 units. Clearly, homebuilders are growing more cautious due to climbing mortgage rates.
Overall, this report is a bit disappointing compared to January, where housing starts hit their highest level in over a year and building permits surged to a ten and a half-year high. However, I expect housing starts and building permits to improve as the year progresses.
In fact, though yesterday’s Housing Market Index (HMI) survey showed confidence among homebuilders dipping to 70 in February, any number above 50 is considered positive sentiment. So, optimism still surrounds the residential sector. And considering that 501,000 single-family homes were under construction last month, the most since June 2008, I’m looking for housing conditions to brighten in the months ahead.
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,