Vanessa M. from Owensboro, KY asks: Hello Mitch, I’ve seen a lot of commentary recently about the economy being weak in January. Is more context needed? Or could this be the beginning of a negative trend for the economy? Thank you for your time.
Mitch’s Response:
Thank you for writing, Vanessa. I know what data you’re referring to, and the short answer is yes – more context is needed.
I would say that economic data in January looked weak and/or undesirable on three fronts: retail sales, industrial production, and inflation as measured by the consumer price index (CPI). If you look at these three data points in a vacuum, the U.S. economy stumbled last month.
Let’s start with retail sales. The Commerce Department reported that retail sales fell -0.8% month-over-month in January, which was more than twice the forecast -0.3% decline.1
The context needed here is that we largely expect January retail sales to be weak following the holiday shopping season, as consumers take a break from spending. It’s worth noting, too, that holiday shopping was quite strong in 2023—the National Retail Federation reported a 3.8% increase with e-commerce sales growing 8.2% year-over-year. We also saw that spending at restaurants and bars rose 0.7% month-over-month in January, and was 6.3% higher in 2024 than in 2023. This data in particular, in my view, shows consumers are still willing to spend, they just pulled back in certain areas.
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Another bit of context on retail sales is that January was an exceptionally cold month across the U.S., with many parts of the country experiencing severe winter weather, travel delays, school closures, etc. These factors can of course impact spending.
Next is industrial production. The Federal Reserve data released in January showed production falling -0.1% when most economists were expecting a +0.2% jump. This underscores softness in manufacturing, which does not necessarily factor as ‘new news.’ U.S. manufacturing has been in a weak patch for the better part of a year, and it is not a very significant contributor to total U.S. output. A majority of U.S. economic output comes from services and spending, not manufacturing.
Even still, there are a couple of bright spots to point out. Fed surveys of manufacturing activity in the New York and Philadelphia areas looked strong, and semiconductor facilities and production are starting to see more activity. The U.S. produced about 20% more semiconductors in January compared to last year, a solid jump and a nod to the transition to high-tech manufacturing that’s underway.
Finally, there was the hotter-than-expected inflation print. Headline CPI registered at 3.1% year-over-year in January, which was materially higher than the consensus for a 2.9% increase. I’d add two pieces of context here. First, January’s CPI print was still an improvement from December’s, which came in at 3.4%. Second, a major component of the CPI calculation is sheltering costs, which accelerated 0.6% in January from December, compared to December’s 0.4% increase. I expect shelter costs to contribute less to inflation data as the year progresses, and it’s also worth noting that the Fed’s preferred inflation gauge, the PCE price index, places a smaller weight on housing costs. I therefore don’t see January’s CPI data as having a meaningful effect on monetary policy this year.
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Disclosure