03/17/2023 | Press release | Distributed by Public on 03/17/2023 11:48
The monthly rise in CPI was strong again in February but was largely in line with our expectations. Both the January and February CPI reports show inflationary pressures that are more broad-based and stickier than at the end of 2022, which is in line with the economy picking up steam to begin the new year. This is also evidenced by the retail sales figure, which only gave back a small part of its January jump and saw core retail sales gain in February after an upward revision to January, indicating consumption is on track for a stronger Q1 than previously thought. The PPI data was a bit more encouraging on the inflation front and suggests some price relief may be on the way, and the industrial production report continues to suggest manufacturing is relatively weak. In totality, though, the incoming data is consistent with the Fed being poised to continue monetary policy tightening. However, this data precedes the collapse of two mid-tier banks, significantly complicating both monetary policy and adding heightened uncertainty to our forecast. The impact of these events on the economy and the Fed's actions remains uncertain. At least for now, we expect the future pace of Fed tightening to be less than what was expected at the start of the month.
Both single-family and multifamily starts are on track to beat our Q1 expectations, meaning a near-term upward revision to our forecasts for both series is likely. Still, single-family permits, which are generally more predictive of the underlying trend, remain at a level that is below the current pace of starts, indicating construction will likely slow moving forward. Additionally, builders still have a significant backlog of single-family units under construction, suggesting they will prioritize finishing these projects rather than breaking ground on new ones. On balance, we continue to believe starts will trend down this year but acknowledge additional uncertainty regarding how developments in the banking system could affect construction activity. While the immediate pullback in interest rates is supportive of housing, potential tighter lending standards and worries about a broader economic downturn may have the opposite directional effect.
Economic and Strategic Research Group
March 17, 2023
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