The powerful American consumer has ignored months and even years of recession predictions from top economists and Wall Street CEOs. With inflation at its highest in 40 years and aggressive interest rate hikes designed to curb it, consumers have managed to continue spending, keeping the economy on solid footing. But this week, some experts are waiting for further upside due to a double whammy of poor economic data.
The second straight weak retail sales report, which included a downward revision to January sales data, has raised concerns that consumers are finally showing signs of wear and tear after enduring about two years of price hikes and rising borrowing costs. “While last month's decline in retail sales was due to the weather, this month's weakness suggests the consumer may not be as healthy as expected,” Damian McIntyre, portfolio manager at Federated Hermes, said by email Fortune.
At the same time, producer price inflation, which tends to outpace consumer price inflation, also exceeded Wall Street's expectations for the second month in a row on Thursday. It's another piece of data that could put investors' dreams of quick, economy-boosting rate cuts on hold, especially since Fed officials have made it very clear that they don't plan to cut rates until inflation is well under control. As Quincy Krosby, chief global strategist at LPL Financial, put it: “For the data-dependent Fed, this report is unhelpful.”
The recent reports on retail sales and producer price inflation are not in themselves bad news for the economy – retail sales are far from a total collapse and producer price inflation is not surging – but the new trends they reveal are worrying. If companies continue to see price increases, they will likely pass them on to already inflation-weary consumers. That could put a halt to aggressive consumer spending that has so far helped stave off a U.S. recession.
The jab: Rising producer prices
The first shock to hit the economy on Thursday was a rise in producer price inflation. The producer price index (PPI), which measures the change in prices paid by domestic sellers, rose 0.6% last month, the Labor Department's Bureau of Labor Statistics reported Thursday. This was compared to economists' consensus forecast of 0.3%.
Year-on-year, producer prices also rose by 1.6% in February. That's well below the 4.7% year-on-year rise in producer prices in February 2023, when inflation was still at 6%, but it is once again the trend that is worrying. After remaining at or below 1.1% since October, including just 1% in January, February's PPI inflation data is a step in the wrong direction.
Producer inflation was largely driven by a 4.4% rise in energy prices in February, which led to a rise in overall goods prices. Falling goods inflation was one of the keys to the decline in overall U.S. inflation last year, but for Citi economist Veronica Clark, the PPI report is evidence that “disinflation in goods prices is largely coming to an end.”
The end of disinflation in goods is likely to put interest rate cuts, which many investors had expected not long ago this month, on hold unless upcoming consumer price inflation reports prove more favorable. “Overall … this will likely continue to keep the Fed on pause over the next few meetings,” said Rob Swanke, senior equity strategist at Commonwealth Financial Network.
The Cross: Weak retail sales
After being hit by a rise in the producer price index, the economy was hit hard by a weaker-than-expected retail sales report.
As the Census Bureau reported Thursday, retail sales rose just 0.6% in February from the previous month and 1.5% from a year ago. In comparison, economists' consensus forecasts assume a monthly sales increase of 0.8%. Even as rising gas prices and incentives for car dealers lead to higher spending, data shows that consumers are starting to rein in their budgets.
“The 1.5% year-on-year increase is minimal and amounts to less than half of the overall CPI figure. In other words, retail sales are lagging inflation,” Ted Rossman, senior industry analyst at Bankrate, told reporters in emailed comments on Thursday. “It is a slow-growth economy for retail, with only e-commerce stores and bars and restaurants seeing annual growth figures above the headline inflation rate.”
In addition to February's slower-than-forecast data, year-over-year sales figures for last month were revised downward from minus 0.8% to minus 1.1%. This is the fourth consecutive month that producer inflation data has been revised downwards.
Jeffrey Roach, chief economist at LPL Financial, told Fortune via email that “the ongoing downward revisions should tell us that the economy is slowing,” although consumers still have some purchasing power given the still low unemployment rate.
What should investors pay attention to if they fear a stunning succession after the recent one-two? Credit card defaults are a concern as credit card debt has reached a record high this year. But Roach had another idea: “A helpful indicator to keep an eye on in the coming months is auto sales. If the economy really slows down, expect vehicle inventories to increase and dealers to offer more incentives,” he said.
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