High-frequency indicators of economic activity pulled back in January as storms and cold weather disrupted day-to-day activity across much of the United States. Unit new auto sales fell to the lowest since last spring, retail sales fell 0.8%, and housing starts plunged 14.8%. Indicators that are less susceptible to weather held up better: Permits filed for new home construction edged down 0.3% (It’s easier to file paperwork to build a house during a snowstorm than to break ground), and confidence surveys covering consumers, homebuilders, and purchasing managers broadly improved. On balance, the data suggest the economy started the year in low gear, but is picking up as the weather improves.
Despite January’s soft patch, Comerica’s February forecast upgrades the outlook for 2024’s real GDP growth, after a stronger-than-expected GDP report for the fourth quarter of last year was released in late January. A recession seems relatively unlikely this year, about a three-in-ten chance. Positive wealth effects from rising house prices and stock prices are supporting consumer spending by affluent households; household incomes are growing faster than consumer prices; and consumers are happy to see stable fuel prices at the pump. These factors support the economy in 2024 and were notably absent in early 2023. January’s jobs report, showing a robust 353,000 nonfarm payroll jobs added on the month and the unemployment rate holding near a half-century low at 3.7%, is further evidence of the economy’s solid forward momentum.
Warmer weather since January contributed to a second 2024 surprise for the economy: Natural gas futures prices fell to near the lowest since the mid-1990s. Temperatures reached record highs in many parts of the country and reduced heating demand in February, while domestic natural gas production is at a record high. In addition to its use heating homes, natural gas is a key feedstock for manufacturing fertilizer, which accounts for about a fifth of the cash cost of food production in the United States according to the USDA. Natural gas prices surged in 2022, contributing to higher food prices since then. If its price stays low, fresh food prices should calm down, too.
The Fed might be happy to see natural gas prices low if they weren’t concerned by bigger-than-usual increases in medical service prices at the turn of year as providers passed on higher input costs. Inflation of “sticky” service prices (charges that change relatively infrequently) was disappointingly hot in January. The Fed’s policymakers are watching these prices like hawks, and January’s unwelcome upside surprise is further reason for them to delay interest rate cuts until mid-2024. Comerica continues to expect the Fed to wait until June to start reducing their benchmark rate, and to make a cumulative three quarters of a percent in rate cuts over the course of this year.
Bill Adams is a senior vice president and chief economist at Comerica. Waran Bhahirethan is a vice president and senior economist at Comerica,
