Single-Family Construction is Lone Bright Spot as Inflation Comes in Hot and Retail Sales Slide

Key Takeaways:

• The Consumer Price Index (CPI) rose 0.3 percent in January and was up 3.1 percent compared to a year ago, according to the Bureau of Labor Statistics (BLS). Excluding food and energy, core CPI increased 0.4 percent over the month and 3.9 percent over the year. The hotter-than-expected report was fueled largely by a 0.6 percent increase in owners’ equivalent rent (OER), the largest monthly increase since April 2023, a 0.7 percent increase in medical care services, and a 1.0 percent increase in transportation services. Rent of primary residence, which typically tracks OER closely, rose a more modest 0.4 percent. Negative categories over the month included used vehicles (-3.4 percent), energy (-0.9 percent), and apparel (-0.7 percent).
• The Producer Price Index (PPI) increased 0.3 percent in January, dropping the year-over-year comparison to 0.9 percent, according to the BLS. Excluding food, energy, and trade services, core PPI jumped 0.6 percent, the strongest monthly gain in a year. Compared to a year ago, core prices were up 2.6 percent, the same as in December.
• Retail sales and food services declined 0.8 percent in January, more than giving back the downwardly revised 0.4 percent gain in December, according to the Census Bureau. While some of the weakness was due to a price-related 1.7 percent drop in gas station sales and a likely weather-related 4.1 percent pullback in sales at building materials, garden equipment, and supply dealers, retail sales were broadly weak with nonstore sales (representing primarily online shopping) down 0.8 percent and sales at general merchandise stores flat. Control group retail sales (excluding auto, building supplies, and gas station sales) which flow into the GDP estimate, declined 0.4 percent, their weakest month since March 2023.
• Industrial production, a gauge of output in the manufacturing, utility, and mining sectors, declined 0.1 percent to 102.6 in January, though the December level was revised upward modestly, according to the Federal Reserve Board. Manufacturing activity dropped 0.5 percent to 98.6, the lowest level since December 2022. Mining output declined 2.3 percent, while utilities output jumped 5.9 percent.
• The National Federation of Independent Business (NFIB) Small Business Optimism Index declined 2.0 points to 89.9 in January, its lowest level since May 2023. On net, negative 16 percent of firms expect higher real sales in six months, a 12-percentage point decline compared to December. Labor market conditions softened, with a net 14 percent of firms planning to increase employment, a decline of 2 percentage points, and 39 percent of firms reporting they have positions they are unable to fill, a decline of 1 percentage point and the lowest level since January 2021.
• Housing starts declined 14.8 percent to a seasonally adjusted annualized rate (SAAR) of 1.33 million, according to the Census Bureau. The sharp swing from December to January was likely due in part to unseasonably warm weather in December boosting construction, while storms and cold weather in January suppressed activity. Single-family starts declined 4.7 percent to a SAAR of 1.00 million, while multifamily starts plunged 35.6 percent to a SAAR of 327,000, the lowest level since the onset of the pandemic. Single-family permits continued a gradual upward trend, rising 1.6 percent to a SAAR of 1.02 million, while multifamily permits continued a downward trend, falling 7.9 percent to a SAAR of 455,000.
• The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index increased 4 points to 48 in February, 14 points higher than its recent trough in November. The component for single-family sales in the present was up 4 points to 52, while the component for single-family sales in the next six months rose 3 points to 60. The index for the foot traffic of prospective buyers increased 4 points to 33.

Forecast Impact:

The CPI was above our expectations in January. The jump in OER was surprising, especially considering the softer monthly gain in rent prices, though we continue to believe both measures will continue to soften over time based on the lagged relationship between CPI measures of housing costs and home price growth/newly signed leases. In fact, the BLS’ new tenant rent index outright declined 4.7 percent compared to a year prior in Q4, which should feed into the CPI measure over time. Further, core CPI has been a poor predictor of the Fed’s preferred core PCE measure of inflation in recent months due to the PCE price index giving a smaller weight to housing and having a more holistic view of healthcare spending. Therefore, we don’t expect the Fed will interpret the January CPI report as indicating that inflation has reignited. Still, the also-hot read in the PPI, particularly the services component, supports our forecast that rate cuts likely won’t occur until the middle of the year.

Retail sales posted a disappointing January, dampening the degree of strong consumer momentum in Q4 carrying over into Q1 growth. Additionally, manufacturing activity was broadly weak and small business optimism dropped to start the year. Taken together, we believe the data is consistent with our expectation for slowing economic growth in 2024.

Single-family starts were in line with our expectations. Permits continued a gradual upward climb, in line with our forecast for modest growth in single-family construction in 2024, though we believe the industry is likely near its current capacity. The plunge in multifamily construction was likely due at least in part to poor weather in January, though the trend of permits there was supportive of our forecast for ongoing softening in multifamily starts throughout 2024.

Nathaniel Drake
Economic and Strategic Research Group
February 16, 2024

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