LIVE MARKETS-My dreary valentine: Retail sales, et al

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MY DREARY VALENTINE: RETAIL SALES, ET AL

Market participants received a bundle of mostly bleak Valentine's Day indicators on Friday, suggesting that U.S. economic health might have been overstated by Fed Chair Jerome Powell this week.

Receipts at U.S. retailers USRSL=ECI slid by 0.9% in January, an 0.8 percentage point surprise to the downside.

While some cold comfort can be found in the prior month's upward revision, to 0.7% from 0.4%, the print marks the biggest monthly drop since March 2023.

Delving deeper into the Commerce Department's report, a 2.8% decline in autos/parts and a 1.9% slide in non-store retail (the segment which includes online shopping) were partially mitigated by a 0.9% increase in sales at the gasoline pump and a 0.9% bump in food/drink services.

So-called "core" retail, which excludes gasoline, autos, building materials and food services - and is closely correlated with the personal consumption component of GDP - defied expectations for a 0.3% increase by tumbling 0.8%.

Citing "uncertainty in a tumultuous political environment, with tariff talk and upheaval in Washington" as potential reasons behind the disappointing report, Carl Weinberg, chief economist at High Frequency Economics writes "today's report will cause all economic forecasters, including us, to mark down estimates of GDP growth."

Not surprising, considering consumer spending accounts for about 70% of the U.S. economy.

The Federal Reserve's industrial output report USIP=ECI offers cheerier news, posting a 0.5% gain in production, compared with the 0.3% estimate.

This agrees with the Institute for Supply Management's (ISM) most recent manufacturing PMI, which showed factory activity made a welcome return to expansion territory last month.

Drilling down, the beat was at least partially attributable to a 7.2% monthly spike in utilities output - stemming from the arctic blast that subjected much of the country to sub-freezing temperatures.

But a 5.2% decline in auto production held the topline in check; excluding motor vehicle output, industrial production increased 0.8% in January.

Capacity utilization USCAPU=ECI, a measure of economic slack, ramped up to 77.8% from 77.5%.

"Production will fall back before long, as demand for durable goods undershoots its trend after tariffs are imposed or the threat recedes," says Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics.

"Further ahead, we remain very skeptical that tariffs will trigger a large wave of reshoring, given the huge labor cost savings available by producing goods overseas, as well as uncertainty about how long protectionist policies will last," Tombs adds.

Back to some bad news; the cost of goods and services imported to the United States USIMP=ECI rose by 0.3% last month according to the Labor Department, cooler than the 0.4% analysts expected, but an acceleration from December's upwardly revised 0.2% increase.

Export prices surged by 1.3%, blasting past the 0.3% predicted by economists.

While import/export prices differ from other inflation indicators in that they are subject to currency exchange rates and foreign demand, this is the fourth consecutive January report to show hotter-than-expected price growth.

Finally, the value of goods stacked in the store rooms of U.S. businesses USBINV=ECI unexpectedly decreased by 0.2% in December, according to the Commerce Department.

In comparison, inventories had been estimated to unchanged from November.

As a reminder, private inventories detracted 0.9 percentage points from fourth-quarter GDP in last month's advance reading.

This report suggests inventories were an even bigger economic drag than originally reported.

(Stephen Culp)

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