On the surface, last week’s economic data looked unimpressive, even a little foreboding. But if one drills beneath the “headline data” (as Street insiders like to call the overall numbers), it’s clear the strong economic expansion appears to be still very much intact. And importantly, information released last week suggests the job market remains robust, while the Federal Reserve still expects the nation’s GDP to grow rapidly this year.
Finally, speaking of the Fed, the central bank still looks poised to cut interest rates later this year.
The Retail Sales Drop Is Not as Negative as It Seemed
Retail sales dropped 0.8% last month, much worse than economists’ average estimate of a 0.3% decline. But January’s colder-than-usual weather likely played a role in the large decline, as the revenue generated by purchases of building materials and garden store merchandise plunged 4.1%. Moreover, working on automobiles in poorly heated garages is less pleasant when the weather is freezing. The low temperatures likely played a role in the 1.7% decline in the motor vehicle parts and retailers category.
Aside from the weather, a decline in gasoline prices and “seasonal distortions” probably played big roles in the large drop in retail sales in January. Indeed, it’s notoriously difficult for the government to account for seasonal changes in January.
Also making the data less worrisome is the fact that sales rose 0.6% last month versus the same period a year earlier, while the sales of restaurants and bars advanced a seasonally adjusted 0.7% in January versus December. The latter figure indicates that many consumers’ discretionary income actually climbed last month compared with the end of 2023.
Headline Inflation Was Distorted
Meanwhile, the Consumer Price Index increased 0.3% in January versus December. CNBC noted that “shelter prices accounted for much of the rise, climbing 0.6% on the month, contributing more than two-thirds of the headline increase.”
Much of the increase in shelter prices can be attributed to a very weird and quite ridiculous metric used by the government called “owner’s equivalent rent.” Indeed, the latter category was the “largest single contributor to January’s excess inflation.”
But owner’s equivalent rent is completely fictional. As The Wall Street Journal noted in August 2023, ” OER is the hypothetical rent you pay yourself as if you were your own landlord.” But, of course, owners don’t pay themselves rent. As a result, it’s (in my opinion) a totally silly and inaccurate means of determining the extent to which actual costs paid by homeowners have risen. Therefore, the real month-over-month inflation rate in January was likely significantly lower than 0.3%.
Also importantly, on a year-over-year basis, the CPI’s increase actually fell to 3.1% last month from 3.4% in December.
Finally, it’s noteworthy that the Fed, which has proven rather good at estimating GDP growth over the last six months, is predicting the nation’s GDP will expand at a seasonally adjusted annualized rate of 2.9% above inflation during the current quarter.
The Fed Looks Ready to Cut in 2024 and Jobless Claims Fell
Chicago Fed President Austan Goolsbee indicated that last week’s higher-than-expected CPI was “consistent” with inflation returning to the Fed’s 2% target and asserted that it was “totally clear that inflation is coming down.” He said he would be in favor of cutting rates fairly soon, as he “think[s] it’s worth acknowledging that if we stay this restrictive for too long, we will start having to worry about the employment side of the Fed’s mandate.”
Former Boston Fed President Eric Rosengren told CNBC last week that he expects “core PCE to continue to trend down.” The latter metric is widely known as the Fed’s “preferred measure of inflation.” He added, “Overall, my expectation is still that we’ll be seeing the first cut in May.” But he also said the first rate prediction could be postponed until June.
Additionally, initial jobless claims for the week that ended on Feb. 10 declined “by 8,000” to a seasonally adjusted and historically very low 212,000. The data shows that, although some major tech companies have been busily cutting jobs, the overall labor market remains strong.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
