The final look at January inflation was right on target, or at least right on expectations. On a year-over-year basis, both headline and core PCE rose at the smallest pace since early 2021, 2.4% and 2.8% respectively. Yet, the monthly increases, 0.3% and 0.4% respectively, were the highest in months and a reversal of the downward trend we have been experiencing. The PCE supercore inflation gauge (core services excluding housing rents), something the Federal Reserve Chair pays particular attention to, doubled in January to 0.6%. Again, this is an aberration of the past few months of data. The only trend that seems to be on target in the Bureau of Economic Analysis report is the pattern of goods and services inflation. Goods inflation was down but services inflation remains sticky, rising 0.6%. The discrepancy between the two sectors is not showing any signs of merging. Aside from that difference, most economists are writing off the January data to the “January effect” – companies tend to frontload prices at the beginning of the year, cost of living adjustments go into effect and portfolio management fees have a heavier weight.
Another aberration for January was in incomes and spending. Personal incomes rose 1.0% - more than double expectations. Spending, on the other hand, rose 0.2%, the weakest showing since October 2023. Most of the spending weakness was in goods, which declined 1.2%. Services spending rose 0.9%. The imbalance between income and spending pushed the savings rate up slightly to 3.8%. The question economists are asking themselves is if the pullback in spending is the beginning of a trend or just the holiday hangover. As with the inflation data, only time and more reports will tell us the truth. Nothing in today’s reports should sway the Fed in either direction at the next FOMC meeting on March 19.
KEY INDICATORS THIS WEEK
Manufacturing – Orders for goods meant to last at least three years plummeted 6.1% in January, the largest drop since April 2020. However, the bulk of the weakness stemmed from a 60% drop in commercial aircraft orders, the most since June 2020. Boeing Co. reported only three orders in January, the fewest in more than three years. When the volatile transportation equipment component is removed, goods orders were down just 0.3%. Better, but still not great. This was the biggest drop in nine months. Many businesses are still committed to making long-term investments, but soaring borrowing costs and demand concerns are leading many firms to dial back expansion plans. Factory production may struggle to find stability in the coming months. The one bright piece of the durable goods report was in core capital goods shipments. This figure (used to help calculate equipment investment in GDP) climbed 0.8%, the most in a year. Shipments are important for the economy because they reflect what’s actually produced, whereas orders give a sense of future investment.
Confidence – Consumer confidence turned around in February, dipping to the lowest level since November after three months of rising optimism. Overall sentiment fell four points on concerns about the labor market and the U.S. political environment. The difference between those saying jobs are plentiful versus hard to get – a metric closely followed by economists to gauge labor-market strength – narrowed for the first time in three months. The outlook for business conditions and rising incomes both fell, while the likelihood of a recession increased. Surprisingly, consumers believe inflation will continue to ease in the next 12 months. Buying plans for large purchases rose to a five-month high.