Redbook Sales Growth Improves
Consumer spending growth has been humming along just fine based on the recent retail sales reports. They haven’t been amazing, but they are good enough to keep the expansion going. Because other aspects of the economy are weak, real final sales growth was low in Q4 and might be that way in Q1. If retail sales growth for the rest of the quarter is near where it was in January, we can expect below 2% GDP growth.
Consumer’s very strong results in Q2 and Q3 covered for that weakness. Once we get over the negative catalyst that is the coronavirus and get deeper into the recovery in industrial production later this year, the GDP report won’t rely on consumption growth as heavily.
Consumer sentiment, confidence, and comfort have been strong in the past few months. Only issue with the consumer sentiment report was that the consumer was mostly excited about the economy. This was mostly because of the stock market’s rally which didn’t lead to improvement in buying conditions for durables. That was only the preliminary sentiment report, but it might mean some weakness is coming in retail sales.
January PCE report will be released next Friday. I expect consumption growth to be fine, but not earth shattering just like the retail sales report. Focus will be on core inflation which should increase by a tick or two. Fed will still maintain rates and might cut them later this year. But this uptick is important because inflation is nearing the Fed’s 2% target. Any move in inflation will be analyzed closely. Finally, the Redbook same store sales report showed yearly growth improved from 4.8% to 5.7% in the week of February 15th. That’s consistent with strong consumer confidence.
Housing Market Is Temporarily On Fire
In the week of February 14th, the MBA composite index was down 6.4% after rising 1.1% in the prior week. Purchase index fell 3% after falling 6%. However, on a yearly basis the index is up 10%. Finally, the refinance index fell 8% after rising 5%. Last week the 30 year average fixed mortgage rate was up 2 basis points to 3.47%. It will likely fall further in the update tomorrow because long rates have fallen.
Header of this section states the housing market is on fire because the housing starts report showed permits exploded and starts were strong again. Housing market was helped by warm weather again. In December, housing starts were revised higher from 1.608 million to 1.626 million as December was even stronger than we previously thought. Starts in January were 1.567 million which was down from last month, but handily beat estimates for 1.42 million.
Highest estimate was beaten as it was 1.48 million. Once the weather stops being a positive factor, the housing market will go back to its slow and steady growth rate. As for now, the Q1 GDP report will be helped by residential investment by a historically significant amount. Since the comp got harder, yearly starts growth fell from 42% to 21%. Last month’s growth was the highest since March 2013.
As you can see from the chart below, unlike last month permits were up significantly. They tend to lead starts which is why last month I said the burst in starts was unsustainable. Permits in December were revised from 1.416 million to 1.42 million, but they still fell sequentially. This report was much different as permits exploded to 1.551 million which was the highest reading in nearly 13 years.
Previous high was March 2007. This beat estimates for 1.453 million and the high end of the estimate range which was 1.47 million. Sequential improvement was 9.2% which was the highest growth since July 2017. 17.9% yearly growth was the highest since June 2015.
Even though starts fell, structures with 5 units or more had starts increase from 531,000 to 547,000 which was the highest total since July 1986. Millennials are moving into apartments in cities. There were 522,000 multifamily building permits which was the most since June 2015. That’s not quite at the historic level starts are at, but it’s the 2nd highest reading of this expansion. They spiked for an unknown reason in June 2015 and then fell right afterwards. The next increase to that level will likely be more sustainable.
PPI Inflation Increases
PCE inflation is expected to increase based on the latest data we have from CPI and PPI. February PPI report showed headline monthly inflation was 0.5% which beat estimates for 0.1%. That improvement likely isn’t sustainable because about 90% of the increase in wholesale costs came from an increase in trade margins which are very volatile. Headline yearly PPI spiked from 1.3% to 2.1% which beat estimates by 0.4%. Similarly, core PPI was up 0.5% which beat estimates for 0.1%.
Yearly core PPI rose from 1.2% to 1.7%. As you can see from the chart below, based on inputs from the CPI and PPI reports, yearly core PCE inflation will be 1.78%. In the PPI report, healthcare services inflation was up 0.4% monthly. Core PCE inflation will rise about 2 tenths, but will stay below 2% as it has for most of the cycle.
If core PCE inflation gets above 2%, the odds of rate cuts should fall. Fed won’t hike rates because inflation has been below its target for most of this expansion, but higher inflation might prevent future cuts. Finally, monthly core PPI excluding trade services rose from 0.2% to 0.4% and yearly core PPI stayed at 1.5% which beat estimates by 0.2%. Trade services pushed inflation higher this month unlike in December.
Retail spending should be decent in February, but it might not show improved growth in the 2-year yearly growth stack. The housing market is on fire, but that will transition to slow and steady growth once the warm weather stop helping the industry. PPI spiked because of a volatile input which will likely not be sustained.
Source: First RebuttalFollow us: