Still on Track

The last measure of inflation for February, and the most important in the Federal Reserve’s eye, came in as expected with a little lean towards good. Headline PCE rose 0.3% for the month, less than expected, while the other key monthly and year-over-year measures were right on target. Core PCE Y/Y was up 2.8%, the same pace as in January. The Fed Chair’s preferred “supercore” inflation gauge — core services excluding housing rents — fell sharply to 0.2% in February from 0.7% and was up 3.3% Y/Y versus 3.5% in January. Nothing in this latest report should cause alarm for the Fed but rather help convince them inflation is slowly moving lower, which should keep the central bank on track for a June or July rate cut.

Housing – Shifting mortgage rates are making it difficult for the housing market to find stability. New home sales fell 0.3% in February, the first decline in three months. The drop is in contrast to the 9.5% surge in existing homes that was reported last week. New home sales are counted when contracts are signed versus closings for existing home sales. Mortgage rates climbed back above 7% in February, likely causing sticker shock for potential buyers as well as inability to qualify for a loan. The median price of a new home fell 7.6% from a year ago as the supply of new homes is at the highest level since October 2022.

A recent report form Realtor.com® noted that renting may now be more economical than owning a home. New rentals fell for the seventh month in a row on an annual basis, according to the Realtor.com February rental report. Prices dropped annually by 0.4%, or seven dollars, to a median of $1,708 a month in February, according to the report. Purchasing a starter home was 60.1% higher, costing buyers about $1,027 more every month. However, the report acknowledges the long-term financial benefit of owning over renting.

Confidence – After faltering a bit in February, consumers began to feel better about their financial situation, and labor market conditions in March but are more pessimistic about the future. Respondents to the Conference Board’s Consumer Confidence Survey® expect job growth and income to decline in the months ahead. Overall, consumers are not concerned about a recession but believe the job market is unsustainable, which could lead to a drop in consumer spending.

Durable Goods – Orders for goods lasting more than three years rose 1.4% in February, better than the expected 1% gain and a nice reversal from January’s drop of 6.9%. This was the first increase in two months and a hopeful sign the seasonal disruption is over. The improvement was driven primarily by a rebound in transportation equipment and motor vehicle orders. Commercial aircraft orders were up 25% versus -64% in January. Orders-minus-transportation, which strips out volatile aircraft orders, rose 0.5%, also the first gain in two months. One area of concern was a 1.4% drop in computer and electronic product manufacturing, the first decline since July 2023. Despite the drop, economists expect this sector to continue improving due to AI demand and investment.