Retail sales and industrial production both fell in January, but there were also encouraging signs.
Decline in both thoughtful production and retail sales
The US economy took a breather in January after brisk growth at the end of last year, but remains "fundamentally healthy".
Retail sales fell 0.8% in January compared with December, the Commerce Department said on Thursday (15.02.2024), much worse than the 0.3% decline expected. Also on Thursday, Federal Reserve data showed that industrial production fell 0.1% in January, compared with expectations for a 0.2% increase.
Technical issues with how the retail sales data were seasonally adjusted may have affected the reading, and the cold weather in January likely had an impact on both retail sales and industrial production.
Encouraging signals
However, there were encouraging signs in Thursday's data set that went unnoticed. In the retail sales report, spending on food services and bars was up 0.7% from December and 6.3% higher than last January - something one wouldn't expect if the economy were suddenly in trouble.
The Fed's surveys of manufacturing activity in New York State and the Philadelphia area in February were both stronger than expected, weekly jobless claims were lower than expected, and there were signs in the industrial production report that the promising shift of the U.S. toward high-tech manufacturing is still on track. For example, semiconductor output rose 23% from a year earlier, according to Capital Economics.
It is not so surprising that consumers and producers took a "bit of a break" in January. Economists had long expected the Fed's rate hike last year to start dragging on activity after a delay. And while there was debate about how much was left of the savings cushion that consumers built up during the pandemic, no one expected those savings to last forever.
Resilience of the economy to high rates
The real surprise is how resilient the economy has been to Fed tightening. Not long ago, the consensus expectation was for an imminent recession. Economists at Morgan Stanley, taking into account January retail sales data and downward revisions to December's sales increase, said Thursday that they expect gross domestic product to grow at a 2% annualized rate in the first quarter. They expect fourth-quarter growth to be revised down to 2.1% from 3.3%.
This month's retail sales report supports the view that the economy is strong but cooling, and there is no reason for the Fed to rush to move rates further in the current environment.
Inflation has eased
Inflation also moderated again in January, but beat Wall Street expectations, masking the Federal Reserve's path of rate cuts and giving the central bank "breathing room" to wait until mid-year.
Consumer prices rose 3.1% in January from a year earlier, compared with a 3.4% increase in December. This is the lowest reading since June.
Still, the consumer price index was higher than the 2.9% expected, which is disappointing for investors hoping the Fed will cut rates sooner rather than later. Rate cuts tend to help stock prices by boosting economic activity and reducing bond competition.
The release caused an unpleasant shock to the markets. Stocks fell sharply and bond yields rose. The Dow Jones Industrial Average fell more than 500 points, or about 1.4%, its worst one-day decline since March. For all three major U.S. stock indexes, it was their worst performance on CPI release day since September 2022 , according to Dow Jones Market Data.