US Weekly Economic Commentary: Stronger for longer?

Downward revisions to retail sales, the results of the latest Quarterly Services Survey, and other data encouraged us to lower our estimate of fourth quarter GDP growth by 0.5 percentage point to a still solid and above-trend 2.5%.

Major data releases this week re-enforced January's blockbuster report on the labor market suggesting the US economy entered 2023 with more momentum than previously anticipated— albeit with firmer inflation.

We revised up our tracking forecast for first-quarter GDP growth, from -1.2% to -0.5%, mainly in response to a huge increase in retail sales and food services in January that more than reversed downward-revised declines over the two previous months. Sales likely were aided by unseasonably warm weather in January. Shifting patterns of spending around the year-end holidays may have contributed to the strong rebound as well.

Nonetheless, there was no denying the underlying strength of sales that appear not to have come from inventories or have been driven by post-holiday price discounts: a stunning 7.2% monthly increase of sales of food services and at drinking places suggests consumers are increasingly unconcerned about COVID. Warm weather drove down the output of utilities sharply in January, and industrial production in the manufacturing sector posted a firm gain following two monthly declines.

Uncomfortably elevated inflation

Recent inflation remains uncomfortably and persistently elevated.

Revised seasonally adjusted data show the core Consumer Price Index rose 5.1% at an annualized rate in the fourth quarter, up from the previous estimate of 4.4%. In January, the core CPI, driven by rapidly rising shelter costs, rose 0.4%, following a like increase in December. Core producer prices accelerated for the fourth consecutive month. The recent depreciation of the US dollar helped end a string of seven monthly declines in the price of non-fuel imports, which rose in January for the second consecutive month.

All told, recent data suggest the US economy is not in recession, the risk of recession in the first half of 2023 appears diminished, and the likelihood of a soft landing has risen.

More aggressive monetary tightening?

While inflation is down significantly from the highs of mid-2022, recent readings are a reminder that the current degree of tightness in labor markets is inconsistent with an eventual return to 2% inflation, and that Fed has more work to do to achieve that long-run objective.

The longer the economy remains stronger, the greater the odds that a mild recession skirted early this year may result in a more severe downturn later this year or early in 2024, the result of a more aggressive and persistent monetary tightening.

Underscoring this point, in remarks made this week, Cleveland Fed President Mester and St. Louis Fed President Bullard noted the case for an increase in the Fed's policy rate of at least another 50 basis points.

This week's economic releases:

• Personal income and outlays (Feb. 24): We estimate nominal personal income rose 0.8% in January, compared with 0.2% in December. We expect nominal personal consumption expenditures (PCE) increased 1.6% in January and real PCE grew 1.0%. A jump in consumption was portended by a previously reported jump in retail sales in January.
• New home sales (Feb. 24): We estimate 604 thousand units in January, compared with 616 thousand units in December. This would leave them in line with what has been a flat-to-firming trend over roughly the last six months, a sign that the housing market may be forming a bottom.
• Q4 2022 GDP second estimate (Feb. 23): We look for fourth-quarter GDP growth to be revised down to 2.5%.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.