Manufacturing output and retail sales were lackluster in February.
February is shaping up as a reversal of January in some respects with weak performance in the industrial and consumer sectors but strong gains in key residential construction metrics. Retail inventories were leaner in January, seasonally adjusted, reducing prospects for further correction.
Consumer inflation overall remained tamer than it had been in much of 2022, but falling energy prices were key. Meanwhile, pricing in key services like shelter continues to rise.
Economic indicators are not signaling any big near-term change in the status quo, but a potential banking crisis raises concerns over the economy and the Federal Reserve’s monetary policy. A troubled financial sector could force the Fed to moderate its aggressive anti-inflation campaign.
Industrial production and manufacturing
Industrial production (IP) was flat m/m in February, but the Federal Reserve revised prior estimates slightly lower back to September. A 0.5% increase in utilities output largely offset a 0.6% decrease in mining. IP was down 0.2% y/y but remained 0.9% above the pre-pandemic month of February 2020.
Manufacturing output ticked up 0.1%, but performance was flat versus the initial January estimate due to a slight downward revision. Output was down 1% y/y but up 1.2% versus February 2020.
Motor vehicle and parts production edged down 0.3% in February but was up 10.8% y/y. Output was essentially even with February 2020.
IP figures could look significantly different soon. The Federal Reserve plans to issue its annual revision of IP indexes later this month.
Retail sales
Retail and food services sales in current dollars ticked down 0.4%, seasonally adjusted, in February after an upwardly adjusted 3.2% jump in January. With that upward revision, the small decline resulted in a February sales level that was marginally higher than the initial January figure.
Non-store retail saw the largest seasonally adjust-ed increase at 1.6% m/m, although sales were down 6.9% on a not seasonally adjusted basis. Other large retail sectors seeing gains included general merchandise stores and food and beverage stores, each of which rose 0.5%, seasonally adjusted.
Department stores saw the largest decrease at 4%, although that followed an upwardly revised 18.1% jump in January. All retail sectors that saw declines m/m during February had seen larger in-creases in January. For example, motor vehicle and parts sales were down 1.8% in February, but the upwardly revised January gain had been 7.1%.
Inflation was a factor in keeping retail sales from falling more than they did. According to data from the St. Louis Federal Reserve, real retail and food service sales declined 0.8% in February. Sales in current dollars were 32.6% higher than February 2020. Sales adjusted for inflation were 14% higher.
Inventories
The upward revision in motor vehicle and parts sales in particular for January resulted in an even-leaner inventory situation for retail than FTR had estimated. Based on initial inventory and sales data for January, we had expected the total retail inventories-to-sales ratio to decline to 1.24 from 1.26 in December, seasonally adjusted. The formal initial re-lease of the data showed the total retail ratio at 1.23. The ratio of inventories to sales in retail excluding automotive came in as expected at 1.15.
With weak inventory growth and strong retail sales in January, most retail sectors naturally saw declines in their seasonally adjusted inventories-to-sales ratio. The inventories-to-sales ratio for general merchandise has been falling since peaking in late summer and in January declined to 1.38, which is the leanest since late 2021 and in line with typical pre-pandemic ratios.
Barring a sharp decline in sales, the current ratio for general merchandise implies that any inventory correction is basically over, at least in that broad sector. One retail sector where inventories remain highly elevated relative to sales is building materials and garden supplies dealers, although the ratio ticked down slightly in January.
Residential construction
The housing sector in February showed further signs of possibly bottoming out. Housing starts rose 9.8%, seasonally adjusted, in February for their strongest m/m increase since March 2021, which had seen an abnormally large jump due to extremely cold weather the month before.
Starts of single-family homes moved up 1.1%, but the real strength was in starts of units in multi-family buildings with at least five units. Multi-family starts jumped 24.1%. Single-family starts were still 20% below the February 2020 rate, but multi-family starts were more than 18% higher.
Permits authorized for future construction saw even stronger growth than did starts, soaring 13.8% – the largest m/m gain since July 2020. Single-family permits saw their first increase in a year and remain 22% below February 2020. Multi-family starts, which have been more volatile, jumped more than 24% and are nearly 69% above February 2020.
Housing completions rose more than 12%. The number of homes under construction has clearly peaked, although multi-family units under construction continue to rise steadily while single-family homes under construction continue to fall steadily.
Consumer inflation
A decline in energy prices and a deceleration in food price increases resulted in slightly tamer consumer inflation during February. The Consumer Price Index for all items rose 0.4%, down from a 0.5% gain in January. The 12-month change in the all-items CPI was 6%, down from 6.4% in January.
A decline in utility prices helped keep prices for services in check, but services inflation otherwise accelerated slightly due to prices for shelter and transportation services. The 0.8% increase in shelter matches December and two months in 1990 for the strongest m/m increase since 1985.
With food and energy moderating February’s all-items inflation, CPI less food and energy accelerated a bit, ticking up 0.5% for the largest m/m gain since September. The 12-month change was 5.5%, down from 5.6% in in January.
Although the monthly increase in the CPI excluding the volatile food and energy sectors is still higher than it was before the pandemic, services are the real issue. The 12-month change in services excluding energy has been rising steadily since the fall of 2021 and is now 7.3%. Conversely, the 12-month change for commodities less food and energy has been declining mostly steadily for a year and is now down to just 1%.
Producer inflation
Drops in final demand pricing for food and energy were largely responsible for a 0.1% decrease in the Producer Price Index for final demand in February. The 2.2% drop in final demand foods is the largest since June 2020 and the third largest in the data, which goes back to late 2009.
Producer-level inflation was mild in February even excluding volatile sectors. The PPI for final demand less food, energy, and trade services ticked up just 0.2%, which matches several months in the second half of 2022 as the smallest gain since May 2020.
Within freight transportation services, the most no-table development was a major downward revision in the PPI for general freight truckload in January. The initial estimate had been a 3.3% decrease from December. With the revision, the January drop was a record 8.2%. The general freight truckload PPI declined another 1.3% in February.
The PPIs for other trucking segments also were down in February but by smaller degrees. The PPI for long-distance specialized trucking declined 0.4%. The LTL PPI was down 0.7%. Neither sector saw the sharp decline general freight truckload had seen in January. Long-distance specialized eased 0.8% in January while the LTL PPI had risen 3%.
February’s decrease in the rail intermodal PPI was more in line with that of general freight truckload at 1.5%. After falling in only two months between July 2020 and July 2022, the rail intermodal PPI has fallen in five of the past seven months. The trailer PPI eased 0.6% in February following a 1.4% decline in January. However, trailer pricing might not continue to fall if the PPIs for key materials are any guide. After steady decreases recently, the PPIs for steel mill products and lumber in-creased in February, and the aluminum PPI rose for the third straight month.
Mortgage rates
Mortgage rates eased for the first time in six weeks. The average rate on a 30-year fixed-rate mortgage fell to 6.6% from 6.73% in the prior week. Freddie Mac attributed the decline primarily to turbulence in the financial markets.
Diesel and petroleum prices
The national average price of diesel fell 3.5 cents to $4.247 a gallon during the week ended March 13. Diesel prices have fallen nearly 38 cents in the past six weeks and were exactly $1 lower than they were a year ago. Prices in the latest week were down in all regions except for the West Coast where they moved up very slightly.
One notable milestone is that the average price of diesel in the Gulf Coast region has now dipped be-low $4 a gallon for the first time since the end of February last year immediately before the historic $1.15 surge in the first two weeks of March.
At least in the near term, diesel prices do not seem to face significant upside pressure. Distillate production and inventories declined a bit in the latest week, but so did crude prices. On March 15, West Texas Intermediate closed at $67.61 a barrel, which is the lowest price since early December 2021.
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