Retail sales likely rose solidly again in December and were likely up 3.2% from a year earlier in the combined November-December holiday shopping season. New car and truck sales rose in December, and a seasonally-adjusted increase in gasoline prices in the month’s CPI report boosted spending at gas stations in the month.
Industrial production was likely flat in December with the ISM Manufacturing PMI hovering near the line between expansion and contraction. Mining output likely grew modestly as the rotary rig count edged higher and domestic crude oil production held flat on the month. Housing starts likely fell in December while building permits and the homebuilder sentiment survey likely both rose, bolstered by the pull-back in long-term Treasury yields and mortgage rates around year-end. Growth was likely concentrated in single-family starts, but multifamily activity will likely stabilize over the course of the year as lower long-term interest rates make more new projects viable.
Inflation data released last week were mixed. The Consumer Price Index (CPI) rose by 0.3% last month and accelerated to 3.4% in December from 3.1% in November on an annual basis. Core CPI, which excludes volatile food and energy prices, matched November’s 0.3% increase and eased a tick to 3.9% in year-ago terms. Shelter costs, up 0.5%, were once again the primary contributor to inflationary pressures and accounted for more than half of the monthly increase.
Energy costs rose on the back of a second consecutive sharp monthly increase in electricity prices. Food prices rose 0.2% last month and were up 2.7% year-over-year (YoY). Inflation of prices of food consumed at home has slowed sharply to 1.3% year-over-year in December from a peak of 14% in August 2022. Inflation in prices of food away from home, on the other hand, has been much stickier and was still 5.2% in the same terms, down from a peak of 8.8% in March. Costs of services excluding shelter and housing, up by 0.4% for the second consecutive month, continue to be a major negative in the last two reports, as they account for about a fourth of all consumer purchases.
More positively, the Producer Price Index for Final Demand (PPI-FD), down 0.1%, fell for the third consecutive month and was up just 1.0% from a year earlier. The goods component of PPI-FD declined by 0.4% on the back of sharp falls in energy and food prices, while the services component was flat for the third consecutive month. Core PPI-FD, which excludes the volatile foods, energy, and trade service components, was up 0.2% in December and up 2.5% from a year earlier.
Steep declines in producer prices have so far been slow to translate into relief for consumers. Financial markets price in roughly 75% odds of the Fed cutting the funds rate in March following the release of the CPI and PPI reports. Comerica sees the Fed as more likely to wait until later in the year to begin reducing interest rates.
The trade deficit shrank in November to $63.2 billion from $64.5 billion in October, as imports fell more than exports. Through November of last year, exports of services have risen by 8.0%, more than offsetting the 2.0% decline in the exports of goods and have contributed to narrow the trade deficit.
Bill Adams is a senior vice president and chief economist at Comerica. Waran Bhahirethan is a vice president and senior economist at Comerica.
