Are we in a recession at this time? Some think we may be, but the January retail sales numbers that were recently released may point a different direction. In their Weekly Market Recap JP Morgan, one of the Portfolio Strategists we utilize for client accounts, wrote this about January’s retail sales and what this may indicate.
U.S. retail sales rebounded sharply in January, exceeding expectations, and signaling that the American consumer continues to spend. After consecutive months of decline into the end of 2022, nominal retail sales jumped by 3% month over month in January. Although seasonal factors and the largest cost-of-living adjustment to Social Security since 1981 may have played a role in this surge, the increase in sales was broad-based, as shown in the chart of the week. Vehicle sales were the largest contributor to growth, and food services – a proxy for services spending — rose by 7.2%, the most since March 2021. With growth better than expected and inflation proving to be sticky, markets have gravitated toward a new narrative of “no landing.”
The retail sales report is important for assessing the state of the consumer, which matters because consumption is nearly 70% of GDP. However, the sustainability of this spending should be assessed in light of a declining household savings rate and climbing credit card balances.
At the beginning of February, the market had priced a terminal federal funds rate below the Federal Open Market Committee (FOMC) projection; however, in the wake of strong jobs, inflation and retail sales reports, markets quickly repriced the terminal rate more in line with the median projection. While it is good to see market and Fed expectations better aligned, stronger economic growth suggests that it may take longer for inflation to come back to levels that are consistent with the FOMC’s mandate.
