Economic Data Reinforce Fed Patience
- Several indicators released this week signaled a moderation in the pace of economic growth, and provided further reinforcement for patience from the Fed on further monetary policy tightening.
- Retail sales rebounded in January, but the gain wasn’t enough to completely wash out the weak readings in December, suggesting a slow start to the year for consumer spending.
- Prices continue to increase only modestly, and with core inflation measures at or near the Fed’s target of 2%, increased risk of a break-out to the upside remains limited.
Economic Data Reinforce Fed Patience
Several indicators released this week signaled a moderation in the pace of U.S. economic growth, and provided further reinforcement for patience from the Fed on further monetary policy tightening.
The week opened with the January retail sales report, which showed a bounce-back in consumer spending after what was the worst month for retailers since the Great Recession. Stripping away volatile components—food, autos, gas and building materials—the control group measure fared even worse in December, declining 2.3%, or the largest monthly decline since 2000. Given that this measure is a good proxy for the goods portion of personal consumption expenditures in the GDP report, the 1.1% rebound in January calmed fears of a prolonged retrenchment in spending.
That said, while we suspect the weak December was due to transitory factors, Q1 spending is dented. December, a key shopping period for consumers, was plagued by a market sell-off, which cramped consumer confidence and reduced household wealth. But, with financial markets having regained all of the ground they gave up in December, and confidence measures trending higher, spending doesn’t appear to be falling off a cliff, but it will be weaker in the first quarter.
Prices data for February remained more or less in check. The Consumer Price Index edged up in February, but lower energy prices over the past year have held down the headline index on a year-over-year basis. With core inflation running at a 2.1% annualized pace over the past three months and on a year-overyear basis, the underlying price trend remains at the Fed’s target, suggesting there is little need (from an inflation perspective) for it to move swiftly on further rate hikes. In last week’s payroll report, we learned that average hourly earnings hit a new cycle high in February, but such heating labor costs have only modestly passed through to consumer inflation. Stronger productivity growth and historically high profit margins present some scope for companies to eat higher labor costs, and suggest inflation is unlikely to get out of hand anytime soon.
Producer prices also remain subdued, rising 0.1% in February, and 1.9% on a year-over-year basis. Through the volatility, core PPI inflation moderated to 2.3%, year-over-year. The recent trend here has remained consistent with that seen from consumer prices, and further affirms that a renewed gain in inflation remains minimal.
The hard data for durable goods were fairly positive, considering the volatile readings on new orders from the ISM manufacturing index in recent months. Core orders and core shipments both notched 0.8% gains over the month. The headline was pushed up by a large gain in aircraft orders—non defense and defense aircraft orders were up 13.1%. Despite volatility in the orders component, uncertainty remains on how durable goods could be impacted in coming months due to the grounding of the Boeing 737 MAX aircraft. Please see our short special report concerning this topic for more detail.
FOMC Meeting • Wednesday
After increasing the fed funds rate each quarter in 2018, the FOMC declared in January that it will be “patient” with future adjustments. We see little reason for the FOMC to have altered its stance since then. Financial conditions have eased further, but a number of other “cross-currents” Chair Powell noted have not abated. Core inflation has eased up a touch and inflation expectations have edged down. The labor market remains tight, but initial jobless claims and payrolls suggest it is improving at a slower pace. Headwinds from overseas persist, with signs of global growth slowing further.
Next week’s meeting will include updated economic projections. We anticipate estimates for GDP growth an