The U.S. economy picked up in February, but the data so far this month is more mixed — leaving room for debate about whether the expansion will indeed “flourish” in the face of rising interest rates, as predicted by Federal Reserve Chair Jerome Powell.
Economic indicators this week and last showed homebuilding and manufacturing hitting their strides and a robust labor market. Still, consumers tempered their retail spending as inflation heated up, sentiment collapsed to a more than 10-year low, and builders grew more concerned about the impact of higher rates on home sales.
“All signs are that this is a strong economy,” Powell said Wednesday, “one that will be able to flourish” even with a less accommodative monetary policy. He was speaking after the central bank hiked interest rates for the first time since 2018, to combat rapid inflation. Demand is strong and forecasters see more of the same, Powell said.
The following charts highlight data from the past two weeks — including readings on inflation, manufacturing and construction, consumer demand and the job market — that form the backdrop to Powell’s upbeat view.
Consumer prices are already rising at the fastest pace in 40 years. A couple of reports this week suggest the pressures will persist. While soaring oil prices have grabbed plenty of attention, there was a sizable jump in the cost of imports last month, even when petroleum is excluded. And the producer price index in February saw the biggest annual increase in data going back to 2010.
And while it only measures activity in one region and one sector of the economy, the Federal Reserve Bank of Philadelphia’s latest figures for March show inflation continues to run hot. An index of prices paid by factories in the region rose to the highest since Jimmy Carter was president more than 40 years ago. Perhaps more concerning was the pickup in a gauge of prices that manufacturers expect to receive for their products.
Manufacturing & Construction
Manufacturing and construction got back in the groove last month. Fed data showed factory output rose 1.2%, the most in four months, in a broad gain across industries after an omicron-related lull in January. At the same time, motor-vehicle production slowed as component shortages continued to disrupt assembly lines.
Residential construction also strengthened as the pace of new-home building raced ahead at the fastest pace since 2006. However, that kind of growth may be harder to come by later this year, as rising mortgage rates — against a backdrop of high home prices — could restrain sales. That explains why homebuilder sentiment throttled back in March to a six-month low.
Soaring inflation may be starting to affect consumer behavior at the margins. Government data this week showed retail sales rose just 0.3% in February after a 4.9% surge a month earlier. And the advance was primarily due to a 5.3% jump in receipts at gas stations, a reflection of the sharp increase in prices at the pump.
High inflation is weighing more heavily on Americans’ psyche. The University of Michigan’s preliminary index of consumer confidence tumbled in early March to the lowest level since 2011 as year-ahead inflation expectations rose to a four-decade high. What’s more, a third of respondents expected their financial situation to get worse, more than twice the year-ago share.
Job openings at the start of the year remained near a record high, suggesting the extreme tightness in the labor market that Powell pointed out this week. There were 11.3 million vacancies in January, down just a tad from the 11.4 million a month earlier.
“What you have is 1.7-plus job openings for every unemployed person,” Powell said. “So that’s a very, very tight labor market. Tight to an unhealthy level, I would say.”
March data suggest the job market remains red hot. The latest weekly report on applications for unemployment benefits shows claims now stand at the lowest of the year and a stone’s throw from levels not seen since 1969. The Philadelphia Fed’s measure of factory employment in the region climbed to a record.