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Economic Watch: Retail Sales Jump But Price Pressures Building

February 15, 2017

By Evan Lockridge

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Retail sales, one of the largest drivers of the U.S. economy, advanced in January, pointing to increased overall growth in the first quarter of the year. At the same time, prices on the retail and wholesale level posted big gains, and the manufacturing component for industrial production ticked higher.

Retail sales rose 0.4% in January from the month before, according to the Commerce Department, while the December level was revised upward for a 1% increase rather than the originally reported 0.6% gain.

This latest hike was better than a consensus estimate by analysts. Except for auto dealers, every major retail sector reported better January sales, according to MarketWatch.

So-called core retail sales, which exclude sales of autos, gasoline, building materials and food, posted a 0.4% increase in January, the same as December’s upwardly revised rise. Compared to the level from January 2016, sales were up 5.6%.

This better than expected start of the year is going to add some credence and support to the strong recovery in consumer confidence we have seen since the presidential election, according to Eugenio J. Alemán, senior economist at Wells Fargo Securities.

“This could reinforce our view that consumer demand will remain the pillar for economic growth during this year and would probably remain strong next year if some of the tax reduction proposals from the new administration come to fruition,” he said.

Alemán noted retail sales have been relatively weak during each first quarter of the year since the recovery from the Great Recession, looking only relatively strong in the face of an even weaker performance from the rest of the components of GDP during the same period of time.

“In fact, if it were not for the U.S. consumer, the U.S. economy’s weak performance would have been even worse than it has been so far,” he said.

Retail, Wholesale Prices Post Biggest Gains In Several Years

Separate reports regarding prices at both the retail and wholesale level show inflation is rearing its head as consumers are opening their wallets more, likely helping to pave the way for more interest rate increases.

The Labor Department reported its Consumer Price Index for January increased 0.6% from the month before, the biggest hike since February 2013 and more than Wall Street analysts were expecting.

A sharp rise in the gasoline prices accounted for nearly half the increase, while advances in the prices for shelter, apparel and new vehicles also were major contributors. When prices for volatile food and energy are removed, the January gain was a more modest 0.3%.

Over the last 12 months the CPI has increased 2.5%, the largest year-over-year hike since March 2012. The annual rate for all of last year was a 2.1% increase.

This follows a Labor Department report from the day before showing prices at the wholesale level increased 0.6% from the month before, the largest monthly gain since September 2012, and is up 1.7% over the past year.

According to Wells Fargo Securities Economist Susan House, the January gain in the Producer Price Index was led by the volatile energy and trade services components, causing the overall hike to be overstated.

The PPI excluding food, energy, and trade services rose a more moderate 0.2% in January and slowed slightly on a year-over-year basis.

“While the trend in inflation remains upward, it is not quickening as fast as today’s headline suggests,” House said. “In addition, both headline and core PPI inflation continue to run below 2% [annually] and signal inflation is not an immediate issue for the Federal Reserve.”

Others, however, disagree, noting the rise in the PPI is evidence that price pressures are beginning to build with Federal Reserve Chair Janet Yellen telling lawmakers on Capitol Hill earlier this week that "waiting too long to remove accommodation would be unwise,” a signal the central bank may be planning more than two expected interest rate hikes this year.

Manufacturing Rises Despite Lower Industrial Production

These numbers were released as a Federal Reserve report showed the total output at the nation’s factories, mines, and utilities fell in January. The manufacturing component alone increased.

Industrial production fell 0.3% following a downwardly revised 0.6% increase in December. The latest performance compares to analysts’ expectations of a flat reading for January.

In January, manufacturing output moved up 0.2%, the fourth gain in the last five months, matching analysts’ expectations, while mining output jumped 2.8%. In contrast, the measure for utilities fell 5.7%, largely because unseasonably warm weather reduced the demand for heating, according to the Fed.

At 104.6% of its 2012 average, total industrial production in January was at about the same level as it was a year earlier.

Capacity utilization for the industrial sector fell 0.3 percentage point in January to 75.3%, a rate that is 4.6 percentage points below its 1972–2016 average.

The overall report was described by analysts at Econoday as “modest.” The real disappointment was in the performance of the manufacturing component.

“This reading hasn't been able to build any momentum to speak of and was held down in January by a sharp 2.9% monthly downswing in vehicles,” Econoday said. “Excluding motor vehicles, manufacturing volumes rose 0.5% which is really the highlight of today's report.”

It noted the industrial economy has been running below average the past two to two-and-a-half year years, since energy prices collapsed in mid-2014. While advance indicators are almost uniformly pointing to a rebound ahead, it has yet to appear in the government's data.

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