Eyes on the Economy: Wholesale Inflation, Retail Sales, Homebuilder Sentiment

Wholesale Inflation Rises

Producer Price Index (PPI), which is a measure of prices paid to producers—in other words, wholesale inflation—increased 0.6% in February, marking the largest month-over-month increase since August 2023 and exceeding market forecast of 0.3%. Goods prices posted the largest increase in six months, driven by surges in energy and food prices.

On a year-over-year basis, PPI increased 1.6%. Annual wholesale inflation has decelerated much faster than consumer inflation, suggesting that the easing of price burdens has not been passed on proportionally to consumers. However, the readings from the first two months of 2024, particularly month-over-month measures, indicate a potential reverse of dropping wholesale prices. While consumers have not proportionally benefited from easing prices seen in the wholesale sector, inflationary price pressure will likely get passed on to buyers. Thus, the upward trend of PPI seen in the last two months serves as a warning sign of potentially fast price increases for consumers.

Retail Sales Have Been Weak This Year

Retail sales posted a year-over-year growth of 1.5% in February after a flat reading in January. Together, the first two months of 2024 have seen relatively weak retail sales. From 1993 to 2023, yearly growth in retail sales averaged 4.8%. On a month-over-month basis, retail sales grew 0.6% in February, following a decline of 1.1% in January. The reading is below the market’s monthly forecast of 0.8%.

The month-over-month gain was driven by building materials and garden equipment, auto dealers, electronic appliance stores and gas stations. Meanwhile, there were recorded declines at furniture stores, clothing, health and nonstore retailers. The so-called core retail sales—excluding food services, auto dealers, building material stores and gas stations—posted no gain at all. Overall, data points to a potentially significant slowdown in consumer spending this year.

Homebuilder Sentiment Pushes Above Breakeven Marker

The National Association of Home Builders (NAHB) Housing Market Index rose to 51 in March, the first time the index posted above 50 since July 2023. A reading above 50 indicates positive homebuilder sentiment on market conditions for sales of new homes. Anything below 50 suggests negative sentiment.

As existing homeowners have been reluctant to sell, inventory for existing homes has been low, driving buyers to new-home construction. With mortgage rates falling below last year’s peak, pent-up demand has led home builders to have improved perspective of market conditions for new sales now and within the next six months. Expectations for mortgage rates to continue falling later this year mean that buyers are expected to jump back into the marketplace. The sentiment is in line with the overall market expectations for the Federal Reserve to cut its overnight rate this year, which will indirectly push down other interest rates. Nonetheless, interest rates are only one factor in the housing market. As home-building activity picks up, builders may find themselves facing high costs for building materials and labor supply that have not yet normalized.

Homebuilder Sentiment Improves

_{Source: National Association of Home Builders; Freddie Mac.}