Data Show Strong Consumer Spending and Inflationary Pressures Persisting

Key Takeaways:

• The Consumer Price Index (CPI) increased 0.4 percent in February, according to the Bureau of Labor Statistics (BLS). Over the year, prices rose 6.0 percent, a slowdown of four-tenths from January, though this is due mostly to base effects. Energy prices declined 0.6 percent over the month as piped natural gas prices pulled back 8.0 percent. Excluding food and energy, core CPI rose 0.5 percent and was up 5.5 percent compared to a year ago. Core goods prices were flat, thanks in part to a 2.8 percent decline in used car and truck prices. Core services, led by a 0.8 percent increase in shelter costs, rose 0.6 percent.
• The Producer Price Index (PPI) declined 0.1 percent in February, according to the BLS. On an annual basis, prices rose 4.6 percent, a sharp slowdown from the 5.7 percent year-over-year gain in January. Final demand for goods prices declined 0.2 percent and final demand for services prices were down 0.1 percent. Core PPI (less food, energy, and trade services) rose 0.2 percent in February and 4.4 percent compared to a year ago.
• Retail sales and food services declined 0.4 percent in February, giving back part of the 3.2 percent gain in January, according to the Census Bureau. Still, part of the decline was due to a 1.8 percent drop in motor vehicle and parts dealers sales. Restaurant and bar sales also gave back some of their January strength, falling 2.2 percent after a 5.6 percent jump the month prior. Core retail sales, which exclude food services, autos, building supplies, and gas stations, rose 0.5 percent in February and were revised upward to a 2.3 percent increase in January, compared to the originally reported 1.7 percent gain.
• Industrial production, a gauge of output in the manufacturing, utility, and mining sectors, was flat in February, according to the Federal Reserve Board. Manufacturing output increased 0.1 percent after a 1.3 percent gain in January. Utilities output, which is highly dependent on the weather, rose 0.5 percent while mining output declined 0.6 percent.
• The National Federation of Independent Business (NFIB) Small Business Optimism Index increased 0.6 points to 90.9 in February. On net, 23 percent of firms expect lower earnings this quarter, an improvement of 3 percentage points. Still, a net 47 percent of firms expect the economy to worsen. Inflationary pressures eased moderately but remain elevated, with a net 38 percent of firms raising average selling prices, down from 42 percent in January.
• Housing starts increased 9.8 percent to a seasonally adjusted annualized rate (SAAR) of 1.45 million in February, the highest since September 2022. Single-family starts were up 1.1 percent to a SAAR of 830,000, while multifamily starts jumped 24.0 percent to a SAAR of 620,000. Single-family permits rose 7.6 percent to a SAAR of 777,000, the first monthly increase in a year, while multifamily permits were up 21.1 percent to a SAAR of 747,000.
• The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index increased 2 points to 44 in March, its third straight monthly gain. The index for single-family sales in the present rose 2 points to 49, though this was partially offset by a 1-point drop in the index for single-family sales over the next 6 months, which hit 47. The foot traffic of prospective buyers index rose 3 points to 31.

Forecast Impact:

The monthly rise in CPI was strong again in February but was largely in line with our expectations. Both the January and February CPI reports show inflationary pressures that are more broad-based and stickier than at the end of 2022, which is in line with the economy picking up steam to begin the new year. This is also evidenced by the retail sales figure, which only gave back a small part of its January jump and saw core retail sales gain in February after an upward revision to January, indicating consumption is on track for a stronger Q1 than previously thought. The PPI data was a bit more encouraging on the inflation front and suggests some price relief may be on the way, and the industrial production report continues to suggest manufacturing is relatively weak. In totality, though, the incoming data is consistent with the Fed being poised to continue monetary policy tightening. However, this data precedes the collapse of two mid-tier banks, significantly complicating both monetary policy and adding heightened uncertainty to our forecast. The impact of these events on the economy and the Fed’s actions remains uncertain. At least for now, we expect the future pace of Fed tightening to be less than what was expected at the start of the month.

Both single-family and multifamily starts are on track to beat our Q1 expectations, meaning a near-term upward revision to our forecasts for both series is likely. Still, single-family permits, which are generally more predictive of the underlying trend, remain at a level that is below the current pace of starts, indicating construction will likely slow moving forward. Additionally, builders still have a significant backlog of single-family units under construction, suggesting they will prioritize finishing these projects rather than breaking ground on new ones. On balance, we continue to believe starts will trend down this year but acknowledge additional uncertainty regarding how developments in the banking system could affect construction activity. While the immediate pullback in interest rates is supportive of housing, potential tighter lending standards and worries about a broader economic downturn may have the opposite directional effect.

Nathaniel Drake
Economic and Strategic Research Group
March 17, 2023

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