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Economic & Housing Weekly Note

Core Retail Sales Growth Remains Soft, and Inflation Reports Push Bond Market Expectations Closer to Fed Rate Cut Guidance

March 15, 2024

Key Takeaways:

  • The Consumer Price Index (CPI) rose 0.4 percent in February and was up 3.2 percent compared to a year ago, increases of one-tenth for both compared to January, according to the Bureau of Labor Statistics (BLS). Gasoline prices were a significant contributor, rising 3.8 percent over the month. Excluding food and energy, core CPI increased 0.4 percent on the month and slowed one-tenth to 3.8 percent compared to a year earlier. After a surprise jump in January, both owners’ equivalent rent (OER) and shelter prices cooled to a 0.4 percent gain in February, though rent prices rose 0.5 percent. The deflation trend in core goods did not continue in February as used auto prices increased 0.5 percent after a 3.4 percent decline the month prior, and apparel prices posted their first gain in six months, rising 0.6 percent.
  • The Producer Price Index (PPI) jumped 0.6 percent in February, pushing the year-over-year comparison up six-tenths to 1.6 percent, according to the BLS. The headline gain was driven by a 4.4 percent surge in energy prices. Excluding food, energy, and trade services, core PPI rose 0.4 percent over the month and 2.8 percent over the year.
  • Retail sales and food services rose 0.6 percent in February, bouncing back from a downwardly revised 1.1 percent decline in January, according to the Census Bureau. Strong categories included motor vehicle sales (+1.6 percent), building materials, garden equipment and supply dealers (+2.2 percent), and a price-related 0.9 percent gain in gas station sales. Control group retail sales (excluding auto, building supplies, and gas station sales), which flow into the GDP estimate, were flat over the month but were revised up slightly in January.
  • Industrial production, a gauge of output in the manufacturing, utility, and mining sectors, increased 0.1 percent to 102.2 in February, though this followed a downward revision to January, according to the Federal Reserve Board. Manufacturing activity rose 0.8 percent but remains below its December level after a sharp downward revision of 0.6 percentage points to January. Mining output rebounded 2.2 percent after weather-related disruptions in January, while utilities output, which is highly dependent on the weather, declined 7.5 percent.
  • The National Federation of Independent Business (NFIB) Small Business Optimism Index declined 0.5 points to 89.4 in February. On net, only 12 percent of firms plan to increase employment, the lowest level since 2016 when excluding the initial pandemic shock, and only 21 percent of firms are planning capital expenditures, the lowest level since April 2023. Thirty-five percent of firms reported raising worker compensation over the past three months, the lowest level since May 2021. At 23 percent, inflation remained the plurality response for the single most important problem businesses are facing, an increase of 3 percentage points compared to January.
Forecast Impact:

Headline CPI came in about in line with consensus and our expectations, though core inflation was a bit hotter than expected. Still, the underlying details were a bit more encouraging than the topline figure. We expect deflation in core goods to resume in future months as used autos auction data continues to show price contraction and supply chains continue to heal. Further, OER slowed after a surprise jump in January, and we continue to see disinflationary forces related to shelter in the pipeline. Two percentage points of the 3.2 percent year-over-year gain in CPI was due to lagged shelter data, and the BLS’s own measure of new tenant rent was sharply negative in Q4 of last year. Over time, this should translate into lower measures of CPI shelter costs. Still, despite the caveats, we believe this CPI report combined with a warm PPI reading is unlikely to provide the “greater confidence” the Fed and Chair Powell are looking for to begin cutting interest rates soon. We continue to expect the first cut to occur in June with risks weighted toward a later cut rather than a sooner one.

Control group retail sales, which feed directly into the GDP estimate, were softer than expected and pose some modest downside risk to our Q1 2024 consumption forecast. Two consecutive weak control group retail sales figures suggest consumers may be retrenching to begin 2024, in line with our forecast for slowing economic growth. Still sluggish manufacturing data in the industrial production report and further weakening in small business optimism are also supportive of slower growth moving forward.


Nathaniel Drake
Economic and Strategic Research Group
March 15, 2024

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.