Year-over-year inflation in aggregate declined modestly in February, but core inflation increased.
Retail sales declined in February as auto sales and sales at miscellaneous store retailers declined. Adjusted for inflation, retail sales declined and were down slightly from a year ago.
Residential construction increased more than expected in February. Most of the strength is in multifamily. Massive growth in multifamily construction will likely lead to a glut of new apartments becoming available just when slowing economic growth reduces demand. That should help reduce rents, which remains a key driver of elevated inflation.
Most measures of jobless claims data declined in the latest data. The labor market is not as strong as it was a year ago, but there is little evidence of major deterioration in the jobless claims data.
Consumer sentiment is down so far in March as worry about recession is growing again, with several bank failures causing stress and volatility in financial markets.
Recession Risks Growing Due to Problems Beyond Just Inflation
After a strong start to 2023 leading to worries about inflation not coming down as quickly as desired, we now see problems in the economy that suggest recession risk over the next 18 months remains high and may be growing. As a result, we may see a Fed that moves more slowly, realizing that any more sudden or overly aggressive results could push the economy into a recession or cause other “black swan” events that send us into recession.
The Fed holds a meeting this week and is scheduled to make the next policy announcement on Wednesday, March 22. Since we are seeing a crisis of confidence in banks, the Fed is facing a very tough decision. Forecasting the trajectory of rates and the economy just got way more complicated.
In the near term, financial markets have seen a flight to safety, which means that investors have piled into U.S. Treasuries, driving up bond prices that, in turn, drive down yields and rates.
While auto loan rates initially retreated, we ended the week of March 17 with mostly higher rates. This means that yield spreads have widened substantially. That is the initial sign of credit tightening in the auto market. We will expect demand to be negatively impacted if wider spreads persist.
In the meantime, wholesale used vehicle values have risen to start the year, and that’s already slowing the stronger momentum we had entering 2023. These conditions do not bode well for strong vehicle demand this spring. The spring and summer will likely deliver a bumpy ride for the economy and auto market.
Inflation Metrics Mixed
According to the Consumer Price Index (CPI), year-over-year inflation declined again in February, but core inflation increased. As expected, the aggregate headline measure increased by 0.4% on a seasonally adjusted basis. The decline followed a 0.5% increase in January.
The core CPI, which excludes Food and Energy, increased by 0.5%, following a 0.4% increase in January. Medical care and education declined, while all other major categories increased. Apparel and recreation saw accelerating increases. Shelter continues to drive the above-target inflation.
Used cars saw a large price decline in the CPI, which is not likely to be repeated in March. New-vehicle prices saw a small gain, just as in January. On a year-over-year basis, core CPI declined to a 5.5% increase from 5.6% previously. The overall CPI year-over-year declined to 6.0% from 6.4% previously. Our estimated CPI for the lowest income quintile fell to 14.6%.
Retail Sales Declined; Auto Sector Underperformed
Retail sales declined 0.4% in February, as expected, CPI data show. The auto sector underperformed the overall retail market as sales excluding motor vehicles and parts declined only 0.1%, while sales of motor vehicles and parts fell 1.8%.
Categories were mixed in February. Non-store retailers (+1.6%) and Health & personal care stores (+0.9%) had the largest gains. Motor vehicles and parts and miscellaneous store retailers (-1.8%) had the largest declines. Retail sales were up 5.4% from a year ago on a nominal basis, down from 7.7% in January. Compared to last year, furniture, home furnishing, electronics, and appliances (-1.0%), gas stations (-1.9%), and motor vehicles and parts (-0.2%) were the only major categories down. In comparison, food services and drinking places (+15.3%) was the category up the most. Adjusted for inflation using the CPI, retail sales declined 0.8% for the month and were down 0.6% from last year.
Residential Construction Rises on Hikes in Multifamily Building
Residential construction increased much more than expected in February. The seasonally adjusted annualized rate of starts increased by 9.8% when an increase of 0.1% was expected, and prior estimates were revised up. Permits increased 13.8% when a 0.3% increase had been expected. The starts increase was mainly in multifamily.
After the February increase, starts were down 18.4% from a year ago and down 7.7% compared to February 2019.
Permits were down in single-family by 1.8% compared to a 2.5% increase in multifamily. Permits increased for the month in single-family (+7.6%) and multifamily (+21.1%) but were down 17.9% year-to-year in total, down 35.5% in single-family, but up 14.4% in multifamily. Permits lead starts, so the permitting pace at 1.524 million units was ahead of the 1.450 million starts pace, which indicates that starts could increase in the coming months.
Massive growth in multifamily construction will likely lead to a glut of new apartments becoming available just when slowing economic growth reduces demand. That should help bring down rents.
Jobless Claims Declined
Seasonally adjusted initial jobless claims declined by 20,000 to 192,000 for the week ending March 11. Non-seasonally adjusted initial claims fell by 21,000. Continuing claims, representing people who previously filed and remain on traditional unemployment compensation declined by 29,000 from the previous week, reducing the total to 1.68 million as of the week ending March 4. That level of continuing claims was 79,000 lower than before the pandemic.
The latest data show that the broadest measure of continuing claims increased by 80,000 to 2.00 million, which lags the traditional number and is not seasonally adjusted. That total measure is up 47,000 over the last four weeks but is 100,000 lower than the pre-pandemic level but at the highest level in a year.
The labor market is not as strong as it was a year ago, but there is little evidence of major deterioration in the jobless claims data. Moreover, jobless claims remain at historically low levels relative to the job base.
Consumer Sentiment Slipped
The initial March reading on Consumer Sentiment from the University of Michigan declined 5.4% to 63.4 as views of current conditions and future expectations both declined. Median expected inflation rates declined. Consumers’ views of vehicle buying conditions declined but remained better than a year ago.
The daily index of consumer sentiment from Morning Consult has declined only 0.1% so far in March. Sentiment has faded in March as gas prices have started increasing again, but over the last week, gas prices have declined 0.5%. Over this previous week, sentiment has declined 0.4%. The average price for unleaded gasoline was $3.46 per gallon on Thursday, March 16, down 19% from a year ago.
One Week to Go: Join us for the Q1 2023 Cox Automotive Industry Insights and Forecast Call hosted by Chief Economist Jonathan Smoke and the Industry Insights team on Monday, March 27, at 11 a.m. EDT. During this 90-minute session, you will hear how the auto industry performed in the first quarter and how the Cox Automotive team sees the industry progressing this year.
Jonathan Smoke is the chief economist at Cox Automotive.