The New Year is proving to have lots of ups and downs as consumer spending slows from the holidays. Tax season is afoot, of course, a time when consumers tend to save more and spend less.
That’s why retail sales fell sharply in January, while November and December sales were revised down. Financial markets rallied because it could mean the Fed cuts rates sooner if such weakness continues.
Wholesale inflation has also fallen sharply, is now close to zero percent annually, yet the financial markets continue to misread the data, fearing the Fed will put off rate cuts until later this year.
The Calculated Risk-enhanced retail sales graph is a great picture of what has happened since the COVID pandemic—incredible swings in activity that continue to confuse both Main Street and Wall Street, thereby mudding the economic waters.
“Advance estimates of U.S. retail and food services sales for January 2024, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $700.3 billion, down 0.8 percent from the previous month, and up 0.6 percent above January 2023,” said the Census Bureau.
Sales were up 3.1 percent from a year ago, below the 5 percent longer term average. Should this be worrisome? It isn’t adjusted for inflation, so retail sales were flat when adjusted for retail inflation that is running at 3 percent.
It means consumers could be taking a break in the first quarter of 2024. Why not? Blizzards in the northern states, tornadoes in the south and midwest, are certainly reasons for consumers to take a pause.
Meanwhile the Producer Price Index (PPI) for wholesale goods and services continues to plunge, as I said. This is the cost of goods and services that go into retail (CPI) inflation, which means overall inflation will continue to fall as well.
PPI Final Demand is now up just 0.9 percent in 12 months, far below the Fed’s 2 percent target. It jumped 0.6 percent in January but monthly prices declined 0.1 percent in December 2023 and advanced just 0.1 percent in November.
That is why economists are saying the inflation dragon has been slayed and consumer confidence is improving. One hint of what’s in store for the New Year was the New York Fed’s 2024 Survey of Consumer Expectations, which shows improvements in households’ perceptions and expectations of their financial conditions and credit availability.
Of particular note was that perceptions about households’ current financial situations improved in January with more respondents reporting being better off than a year ago and fewer respondents reporting being worse off. The percentage of respondents expecting to be financially the same or better off 12 months from now is 76.5%, its highest level since September 2021. (my emphasis)
This is a major reason consumer confidence has been rising over the past several months.
I reported last week that the University of Michigan’s sentiment survey, for instance, also reported consumers much more optimistic about their finances and the inflation outlook.
“Consumer sentiment confirmed its early month reading, surging 13% to reach its highest level since July 2021, reflecting improvements in the outlook for both inflation and personal incomes,” said survey director Joanne Hsu. “January's gain has been exceeded only five times since 1978, one of which was last month at an even larger increase of 14%.”
So contrary to what the financial market are reacting to, both wholesale and retrial inflation continues to trend down. But it’s a bumpy ride,, one Fed Governor warned, and as illustrated in the graphs.
Harlan Green © 2024
Harlan Green on Twitter: https://twitter.com/HarlanGreen
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