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're serving a bad news sandwich, with a not-so- great retail sales report placed between great news on inflation and housing. I know what you're thinking, shouldn't that be a good news sandwich? Well, we did a bit of research on this--that is what we do after all-and the consensus seems to be it's a bad news sandwich. Either way, it's good news, bad news, and good news all in one report. And remember that two out of three ain't bad. RIP Meat Loaf.
Producer Prices Fell More Than Expected in December
The producer price index declined 0.5% last month, a larger decrease than the 0.1% Dow Jones estimate. Over the past year, producer prices are up 6.2%, their lowest annual increase since March 2021. Theannual increase in PPI peaked at 11.7% in March 2022, so much progress has been made over the past nine months. Just like the consumer price index, most of therecent decline in PPI can be attributed to falling energy prices. Core PPI—which removes food, energy, and trade services—rose 0.1% in December.
You can see all theexciting data in theLabor Department’s report at this link.
Bottom line is that it’s good news that inflation is coming down at both the producer and consumer levels. That said, don’t expect theFederal Reserve to stop hiking rates just yet. They’ve stated repeatedly they will do what’s necessary to get inflation under control, regardless of how unpopular their actions might be. Their next rate decision comes on February 1, and thesmart money is betting on a 0.25% hike in short-term rates.
Retail Sales Declined 1.1% Last Month
Now for the bad news.
Retail sales were 1.1% lower in December than the prior month, worse than the 1.0% forecast, and the biggest monthly decline in a year. To add insult to injury, November’s retail sales data was revised lower, from a 0.6% to a 1.0% decrease. Remember that retail sales are not adjusted for inflation, so part of the decline over the past two months can be attributed to falling prices for some goods.
The biggest decrease in sales last month was at gas stations (-4.6%) and furniture stores (-2.5%). Food and beverage stores posted no change in sales from November, while increases were led by building materials and supplies dealers, who posted a 0.3% gain in sales last month.
So, while this is bad news, it certainly shouldn’t be a big surprise to anyone. TheFed’s rate hikes are meant to cool down theeconomy, which we’ve seen in the past two retail sales reports. We also should remember that while inflation is coming down, it’s still rising much faster than wages, which continues to erode the purchasing power of Americans.
You can find the full report on December retail sales here.
For the final part of our sandwich—is it lunchtime yet? —we turn to the housing market. That’s right, I said we have good news about the housing market.
Mortgage Demand Surged 28% Last Week
According to theMortgage Bankers Association, mortgage applications for theweek ending January 13 were 27.9% higher than the prior week. A sharp decline in mortgage rates to their lowest level since September 2022 was the main reason for thejump in activity. Falling rates have also put homebuilders in a better mood, as sentiment rose for thefirst time in a year this month.
A recent uptick in supply has brought down home prices thepast few months, which has also helped increase demand for mortgages. While applications for both purchase and refinance mortgages remain well below a year ago, lower rates and more supply should keep demand rising in the coming months. So, just like inflation, mortgage demand has a long way to go, but at least it’s moving in the right direction.
You can read the full report from the MBA at this link.
Have a great weekend, and although I’m a Jets fan, best of luck to theGiants. New York needs winning teams, even if they play in New Jersey.