Companies Are Pushing Up Grocery Prices—And Consumers May Be Pushing Back, White House Economist Says

The view from the checkout aisle at the grocery store hasn’t been so rosy—and President Joe Biden’s top economic advisor says food companies are partly to blame.

Grocery prices rose 0.4% in January, the most in a year, the Bureau of Labor Statistics reported Tuesday. Spending at grocery stores rose 0.6% in January from December, even as people pulled back their spending in other areas, the Census Bureau said Thursday in its monthly report on retail sales.

“Certainly people are fed up with high prices,” Lael Brainard, director of the Council of Economic Advisors at the White House said Thursday at a conference of the National Association for Business Economics in Washington. “The prices of the things that they buy on a weekly basis, groceries in particular, are not back to normal. And I think they're choosing to shop in different ways … that should help to pressure some margins and grocery prices to come down.” 

Read more about Brainard's comments here.

Many Factors Played into January's Surprising Spending Rates, Economists Say

Weather to technical factors in the collection of data helped depressed consumer spending to surpass economists' estimates Thursday.

Overall, retail sales dropped 0.8% in January to $700.3 billion, blowing by the 0.3% decline that economists had projected, breaking a trend of better-than-expected sales figures. Economists pointed to a myriad of factors that contributed to the larger-than-expected decline:

• Winter weather across the country had some impact on lower retail sales in January, economists said. Goldman Sachs analysts pointed out that the weather couldn't account for the entire drop as both online shopping and restaurant spending fell.
• January spending is typically lower as consumers recover from holiday shopping, so the dip was not entirely unexpected. However, the magnitude surprised economists and could be worse than it seems, Wells Fargo economists wrote Thursday.
  "In some ways, a weak January is expected and can be chalked up to seasonal behavior coming off the holidays at the end of last year," Wells Fargo's Tim Quinlan and Shannon Seery Grein wrote. "But the Census Bureau adjusts the data for these seasonal effects, a process that typically boosts January sales, which implies unadjusted sales were even weaker last month."
• The retail sales report is notoriously not adjusted for inflation. A trade group representing retailers said the nuances of this week's consumer price index report could have impacted the numbers.
  "January prices for goods came down, which affects sales figures even if the same number of items are sold, and increased prices for services pulled dollars away from retail purchases," the National Retail Federation said.
• Downward revisions to prior months, especially prevalent in November's data, were also important in understanding today's numbers.
  "Perhaps the biggest surprise in today's report was the magnitude of downward revisions to the prior two months," wrote Bank of America analysts after the retail sales report was released. "These revisions significantly lower the trajectory of retail spending in 4Q, which means the weak January data were paired with a much softer handoff to 1Q."

Read more about the intricacies of Thursday's retail sales report here.

Mortgage Rates Jump to Highest Levels Since December

The average 30-year fixed-rate mortgage rate jumped to 6.77% Thursday, up to the highest level since mid-December.

The average was up from the prior week which clocked in at 6.64%. "On the heels of consumer prices rising more than expected, mortgage rates increased this week,” said Sam Khater, Freddie Mac’s chief economist in a prepared statement. “The economy has been performing well so far this year and rates may stay higher for longer, potentially slowing the spring homebuying season."

UK and Japan Fell into Recessions at the End of Last Year 

Today’s retail sales data may have raised concerns that U.S. shoppers are buying less, but two major economies are already feeling the effects of slower consumer spending. The U.K. and Japan entered into recessions at the end of last year, data out Thursday show, as cutbacks in spending by British and Japanese consumers took a toll on their economies. Both country's gross domestic product fell in the third and fourth quarters of 2023, the technical definition of a recession. Japan’s shrinking economy has changed global dynamics. The GDP decline has led its economy to fall to the fourth-largest globally, with Germany taking over the third spot behind the U.S. and China. 

The weakness in the two major economies is in stark contrast to that of the U.S. The American economy grew at an annualized rate of 3.3% in the fourth quarter, far faster than the 2% economists were expecting.

Read more about the two economies here.

-Nisha Gopalan

Homebuilder Confidence is Rising on Potential for Lower Mortgages

Homebuilders are becoming more confident in the trajectory of the housing market, as sentiment improved for the third straight month in February.

The National Association of Home Builders (NAHB) released their homebuilder confidence index Thursday, coming in at 48. That's four points above the prior month and two points above economists' expectations. The confidence was at the highest level since August 2023.

“With future expectations of Fed rate cuts in the latter half of 2024, NAHB is forecasting that single-family starts will rise about 5% this year,” said NAHB Chief Economist Robert Dietz in a prepared statement. “But as builders break ground on more homes, lot availability is expected to be a growing concern, along with persistent labor shortages. And as a further reminder that the recovery will be bumpy as buyers remain sensitive to interest rate and construction cost changes, the 10-year Treasury rate is up more than 40 basis points since the beginning of the year.”

Industrial Production Declined in January

Industrial production decreased 0.1% in January, lower than the 0.2% that economists expected after December saw no change, according to data from the Federal Reserve Thursday.

The Federal Reserve uses the index to measure manufacturing, mining, and electric and gas utilities activity. Those areas make up the industrial sector, which accounts for much of the country's output.

Winter weather complications led to a 0.5% decline in manufacturing output in January while mining fell 2.3%. The need for heating during winter weather pushed the utilities index up 6%.

Manufacturers in New York Have Improved Outlook

A monthly survey of New York's manufacturers showed Thursday that business conditions are improving.

The Empire State Manufacturing Survey from the Federal Reserve Bank of New York surprised economists, who expected the general business conditions index to come in at -13.5 as opposed to the -2.4 result.

Other aspects of the index showed more shipments, less unfilled orders and shorter delivery times. Manufacturers reported that orders and inventories declined, but despite that, saw an improved six-month outlook.   Several Federal Reserve banks report regional manufacturing survey results as a way to give a snapshot into the industry.

Prices on Imports and Exports Grew in January

Instead of falling as economists predicted, prices on U.S. imports grew 0.8% in January, according to a report Thursday from the Bureau of Labor Statistics.

Economists expected a 0.1% drop in the import price index after December's 0.7% decline but higher prices for fuel and imports contributed to an increase. Export prices wiped out a 0.7% decline in December by jumping 0.8% in the first month of the year.

U.S. Retail Sales Fell Sharply in Reverse of 2023 Spending Trends

U.S. retail sales dropped more than expected in January, as the $700 billion in consumer spending was 0.8% lower from the previous month. That number was even lower than the more modest decline of 0.2% that economists were looking to see.  Excluding automobile sales, retail sales declined by 0.6% in January, well off the 0.3% gain that analysts had forecast.

The first results for 2024 buck the recent trend of stronger-than-expected consumer activity, where strong spending helped support economic growth in 2023. 

-Terry Lane

Fewer People Are Filing For Unemployment Insurance Than Expected

The number of people filing for unemployment insurance for the first time fell during the week ending Feb. 10.

Data released by the Department of Labor Thursday showed initial claims were 212,000, down 8,000 from the previous week's revised level of 220,000. The reading came as a surprise, as economists on average expected there to be more claims than the prior week, according to a survey by Dow Jones and the Wall Street Journal.

The four-week moving average is often looked at by economists as a less volatile measure. For the week ending Feb. 10, that average increased by 5,750 to 218,500.