Last week’s incoming data provided further evidence of firming inflation but also led to further downward revisions to estimates of Q1 growth. The CPI and PPI data for February suggest that core PCE prices likely increased a solid amount as well and that the 12-month rate will be reported as having increased to 1.6%. We think there have been sufficient firmer monthly readings for the FOMC to acknowledge the trend in this week’s postmeeting statement, though they will continue to note that the 12-month rate remains below its objective (See our FOMC Briefing).
Last week’s data also continued another recent trend–downward revisions to estimates of Q1 growth. In particular, last week’s retail sales report for February was the third consecutive disappointing report. Sales in the control group, which includes only those categories of retail sales that are direct inputs into the PCE data, were significantly weaker than expected in February, edging up only a tenth. Estimates of Q1 real GDP growth have declined to around 2%, from closer to 3% a couple months ago. We expect such spending data—like the firmer inflation data—to be acknowledged in the first paragraph of the statement. However, we aren’t concerned about the economy’s momentum, primarily because of the unambiguous strength of the labor market data (See our Macro Views). Continued strong readings on consumer sentiment, including in last week’s Michigan survey, elevated equity prices, and the recent tax cuts all point to a solid outlook for consumer spending.
Housing starts and permits were also disappointing, declining substantially in February. The data weren’t nearly as bad as the headline figures suggested, however, as those declines were driven by outsize declines in the volatile multifamily category. Single-family starts advanced, but single-family permits declined for a second consecutive month. Not all of last week’s output and spending data were weak, however. Industrial production advanced 1.1% in February, well above the consensus, with manufacturing and mining output posting strong gains.
There were no public remarks from Fed policymakers last week because of the blackout period ahead of this week’s FOMC meeting.