Gregory Heym is Chief Economist at Brown Harris Stevens. His weekly series, The Line, covers new developments to the economy, including trends and forecasts. Read on for the latest report and subscribe here to receive The Line in your inbox.
Today we have two pieces of bad news, that somehow cancel each other out. Welcome to the "bad news + bad news = OK news" edition of The Line.
Before we get to the details, I'd like to point out that this is the 200th edition of The Line. Hard to believe I've written that many columns, but our marketing department has the numbers to prove it. A big thank you to my loyal readers for supporting The Line, and thanks to everyone in the marketing department that has edited, designed, and sent it out over the past 3 years.
In case you are wondering, the first edition of The Line was released on July 16, 2020. The big story that day was mortgage rates falling below 3% for the first time ever. So much for the good old days of cheap money; let's get to this week's news.
Prices Up More Than Expected in January
The consumer price index rose 0.3% in January and was 3.1% higher than a year ago. Economists were looking for a 0.2% monthly gain and an annual increase of 2.9%, so this data was higher than expected. Housing remains the biggest driver of inflation, accounting for over two-thirds of the monthly increase in CPI.
Core CPI—which excludes food and energy prices—rose 0.4% last month and was 3.9% above last year’s level. These figures were also above forecasts. The reason core inflation is running higher than the overall number is that energy prices were down 0.9% last month and are 4.6% lower than a year ago.
The monthly change in core CPI is something the stock market watches very carefully. The 0.4% increase in January was the highest monthly gain since April 2023. It’s also concerning that core CPI is running higher than the headline number, as core inflation typically takes longer to come down.
The stock market was swift to show its displeasure with this report, as the Dow fell over 500 points. Stock traders don’t like higher-than-expected inflation data, as it means they will have to wait longer for the Fed to start cutting rates. They were hoping to get cuts beginning next month but will now have to wait until the second half of 2024.
Retail Sales Down More Than Expected in January
Retail sales declined 0.8% last month, a much bigger drop than the 0.3% figure economists predicted. This was the biggest monthly decrease in retail sales since March 2023. It’s important to remember that this data is not adjusted for inflation, so even with big price increases last month—see the above article—consumers spent less in January than in December.
Rather than pointing out all the places where sales fell in last month, it will be quicker to highlight the few with gains. Furniture stores (+1.5%), restaurants and bars (+0.7%), and food & beverage stores (+0.1%) were the only major categories with an increase in sales during January.
While this data is bad news—consumer spending accounts for about 70% of GDP—it does help mitigate the bad news on inflation. For rates to come down—especially mortgage rates—the economy must slow down. We shouldn’t be rooting for a recession, but the economy continues to perform much better than expected, which has kept 30-year mortgage rates flat so far this year.
In last week’s column, I pointed out that credit card debt reached a record $1.13 trillion in 4Q23, and delinquencies were up 50% last year. This tells us that consumers have pretty much maxed out their credit cards and must reduce spending. Look for steady declines in mortgage rates in the second half of 2024 as the economy cools further, but I still think we will avoid a recession.