Retail Sales
Coming into the week of January 22nd, we begin our economic update with retail sales which increased both month-over-month and year-over-year. The year-over-year increase was noticeably strong at over 5%.
However, when we adjust for inflation and show the real retail sales not only do we see the gain decline, but we also see that for monthly and annual rates, we are only now having positive real growth in retail sales. In other words, the consumer has generally increased spending to keep pace with inflation, or in the case of last year, they could not even keep pace.
With real retail sales now positive we are just beginning to see a growth in real wealth for consumers and it seems too early for the Fed to declare victory over inflation.
To provide another perspective, we see how high inflation rates will have a negative effect on consumer sentiment.
It is true that many factors will influence consumer sentiment but definitely the recent growth in inflation was a factor.
What we also need to keep in mind is that the effects inflation is cumulative so it will take some time for the consumer to really feel wealth catch up to inflation in terms of standard of living and advancement.
Inflation Outlook
Of course in the upcoming week, we will get a fresh reading on the PCE (personal consumption expenditure) deflator which is the Fed’s preferred measure of inflation. Currently, the markets generally expect rate cuts to begin in March, but the PCE reading will give us some more insight.
Housing Market
Existing home sales also weakened last month with both the number of homes sold and the median sales price showing declines.
However, mortgage rates have also been declining and we would expect sales to pick up over the course of the year. We would also note that the existing housing market remains fairly tight with the months supply at 3.2 months (recall, anything below 5 months supply is considered tight).
Housing starts also decline after a strong surge in November.
Month-to-month new housing starts is fairly volatile, but overall, the trend has again turned positive and it appears that housing is finding its footing.
Economic Outlook
Productivity also showed gains which is in line with the increase in ISM manufacturing that we saw earlier in the month, but manufacturing is showing improvement.
Overall, the economic news was positive and if earnings and PCE numbers show improvement in their readings this week, we would expect ongoing optimism in the markets. On the geopolitical front, the ongoing attacks on shipping in the Red Sea is beginning to show up in the cost of shipping as many are choosing the long route around the southern tip of Africa. So far this has not resulted in serious delays but we will keep our eyes on things.
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