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Amidst the apparently lackluster economic data last week, punctuated by ominous undertones, lies a striking revelation. Scrutinizing beyond the “headline data,” it becomes evident that the robust economic expansion endures. Remarkably, recent information affirms the resilience of the job market, while the Federal Reserve anticipates rapid GDP growth to persist throughout the year.
Of specific note, the Fed appears poised to lower interest rates in the coming months.
Weathering the Retail Sales Decline
Despite a substantial 0.8% drop in retail sales last month, considerably worse than the average economist prediction of a 0.3% decline, a closer look reveals the influence of January’s atypically cold weather. The purchase of building materials and garden store merchandise nose-dived by 4.1%, likely impacted by the frigid temperatures. Furthermore, the plummeting 1.7% in motor vehicle parts and retailers sales can also be attributed to the unpleasant working conditions in poorly heated garages during freezing weather.
Beyond weather dynamics, the decline in gasoline prices and “seasonal distortions” likely significantly contributed to the sharp retail sales dip in January. Notably, the government’s challenge in accounting for seasonal changes in January is well-documented.
Furthermore, the data’s worry factor diminishes as the year-over-year sales surged by 0.6% last month, and sales of restaurants and bars, on a seasonally adjusted scale, ascended by 0.7% in January compared to December. The latter signifies an increase in discretionary income for many consumers last month, in contrast to the close of 2023.
Distorted Headline Inflation
The Consumer Price Index recorded a 0.3% increase in January compared to December. However, as CNBC highlighted, “Shelter prices accounted for much of the rise, climbing 0.6% on the month, contributing more than two-thirds of the headline increase.”
A significant portion of the mounting shelter prices can be attributed to a rather bizarre and illogical government metric called “owner’s equivalent rent.” This particular category stood out as the “largest single contributor to January’s excess inflation.”
Nevertheless, owner’s equivalent rent rests on a completely hypothetical premise. As reported by The Wall Street Journal in August 2023, “OER is the hypothetical rent you pay yourself as if you were your own landlord.” However, in reality, property owners do not pay themselves rent. Consequently, employing owner’s equivalent rent as a measure to gauge the actual rise in homeowners’ costs presents a remarkably nonsensical and inaccurate approach. Consequently, the real month-over-month inflation rate in January likely stands notably lower than the reported 0.3%.
Crucially, on a year-over-year basis, the CPI’s increase regressed to 3.1% last month from 3.4% in December.
Positively, the Fed, with a commendable track record in estimating GDP growth over the last half-year, anticipates the nation’s GDP to burgeon at a seasonally adjusted annualized rate of 2.9% above inflation in the current quarter.
Fed’s Outlook on Rate Cuts and Jobless Claims Plummet
Chicago Fed President Austan Goolsbee asserted that the higher-than-expected CPI figures from last week are in line with inflation reverting to the Fed’s 2% target, and categorically emphasized that “inflation is coming down.” He advocated for a prospective rate cut, rationalizing that prolonged restrictive measures could precipitate concerns about the employment aspect of the Fed’s mandate.
Former Boston Fed President Eric Rosengren, in an interview with CNBC, anticipated “core PCE to continue to trend down.” Core PCE serves as the Fed’s “preferred measure of inflation.” He further projected, “Overall, my expectation is still that we’ll be seeing the first cut in May,” albeit hinting at the likelihood of a postponement until June for the first rate cut.
Additionally, the week ending on Feb. 10 saw initial jobless claims decline by 8,000, reaching a historically low and seasonally adjusted figure of 212,000. This data underscores the enduring strength of the overall labor market, despite notable job cuts at major tech companies.
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.
