Trend watch and what’s new this week
Wicked winter weather has given way to spring break, which is rippling through much of the activity-based data (slides 5 and 6). For instance, hotel occupancy has jumped to 64.7%, the highest level in six months. Weekly air passenger counts have climbed for five of the past six weeks and are now above 16.5 million for the first time since the Christmas/New Years week of 2019. Dining reservations have been especially strong in recent weeks, as the 7-day average soared to 51.1%, which is a fresh post-pandemic high.
Additionally, this week kicks off the NCAA Men’s and Women’s Basketball Championship Tournaments, aka March Madness. Aside from the sport, both tourneys trigger travel and entertainment spending in 14 different host cities for the men along with three for the women. This year’s Final Four portions will be held in two weeks in Houston and Dallas, respectively. In case you’re feeling the “luck of the Irish,” just 787 perfect brackets are left from over 20 million entries to popular websites.
Consumer inflation cooling but core prices up in February
On slide 7, we show the Consumer Price Index (CPI), which rose 0.4% in February as energy prices ebbed. The year-over-year pace for CPI slipped to 6.0% from 9.1% in June ‘22.
On slide 8, core CPI, which excludes food & energy, rose 0.5% month-over-month and increased 5.5% from a year ago. Among the biggest decliners were used vehicles, which fell 2.8%, down for the 11th time in 13 months. However, prices for services increased by 0.6%, propelled by shelter (rents), which rose 0.7% during the month.
On slide 9, we provide some possible inflation scenarios. While there are a wide range of potential outcomes, we expect CPI to trend toward 3% to 4% by year-end 2023. That would be considerably lower than the peak this past June, but still above pre-pandemic levels. Of course, a recession would accelerate the cooling of prices.
Wholesale prices see second drop in three months
On slide 10, the monthly pace of wholesale prices, as measured by the Producer Price Index (PPI), fell 0.1% in February, as food and energy dropped during the month. It was the second drop in wholesale prices in three months. The year-over-year pace slipped to 4.6% from the peak of 11.7% in March ’22. Core CPI, which excludes food & energy, was flat, while the annual change continued to slide, up 4.4% from a year ago.
Private rental data shows prices plateaued
On slide 11, we show rents from private rental sources for new leases. Rents spiked during 2021, which continued into 2022, growing 1.0% per month on average through August. However, rents have cooled considerably since then and appear to have plateaued. Rental prices in February rose 0.3% month-over-month to snap a four-month decline, but remain below the average since 2015 of 0.4%.
February retail sales dinged by autos and gasoline
Retail & food service sales in February fell 0.4% following an upwardly revised jump of 3.2% during January (slide 12). It was largely due to a sharp drop in auto and gasoline sales. Excluding both autos and gasoline, retail sales were flat compared to January. Still, it was the fourth decline in the past six months.
New housing activity showing signs of life
On slide 13, we illustrate some of the new housing components, including new starts and permits. The latter is considered a leading economic indicator. Single-family starts and permits both rose in the same month for the first time since February 2022. Moreover, two home builder surveys – prospective buyer traffic and builder confidence – both rose for the third straight month. Though both remain severely depressed compared to normal conditions, they demonstrate a stabilization in activity. Separately, construction hiring increased in 85% of metro areas, or 306 of 358, from a year ago.
As evident in the prior section, there are continued cross currents in the data. To be fair, though, the majority are now decidedly negative compared with just a few months ago, when the data was mostly positive sprinkled with some gloominess.
Yet, this week’s new challenge was a pair of bank failures, the first since October 2020. Contagion concerns and market skittishness sparked a powerful flight into U.S. Treasuries, driving yields sharply lower.
Credit conditions had been tightening for months, along with financial conditions. This latest episode will likely accelerate both and pull forward the onset of a recession. That said, timing a recession can be a fool’s errand. Economic growth has ratcheted lower, which will likely persist. More importantly, many businesses have long been behaving as if a recession began in 2022, replete with broad belt tightening measures.
Accordingly, the Federal Reserve (Fed) now faces a difficult decision at its meeting next week. It must decide whether to prioritize financial stability or its fight against inflation, which is cooling but not fast enough. Frankly, it’s probably a coin toss between a quarter-point hike (0.25%) or a pause to reassess conditions with plenty of valid reasons supporting either course of action.
Whether or not the Fed raises rates by 0.25% or not, we believe the Fed’s overall rate hike cycle is effectively over. For the second time in as many weeks, market expectations for the Fed funds target have been dramatically reset; this time, lower. Markets now anticipate rates will peak below 4.9% in next couple months and fall below 4% by year-end (down sharply from 5.3% less than two weeks ago). However, inflation will need to continue carving a clear path lower before the Fed will begin cutting rates in our opinion.
We foresee a recession in the coming 12 months, most likely in the back half of 2023, though the timing is dicey. In the meantime, expect more crosscurrents in the economic data, like the February jobs report.
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