Retail sales and nonfarm payrolls offer options for the Fed

  • January retail sales far exceed forecasts, December declines more than the initial release.
  • Job creation jumped in January and in the fourth quarter.
  • The Fed minutes highlight inflation but do not signal a change in the FOMC.
  • Ukraine remains a wild card, the invasion will prevail over the economy, inflation.

For now, Americans are depressed but consolable.

Consumer sentiment was the worst in nearly a decade last month, but the depression didn’t keep anyone at home. Consumer spending posted the strongest increase in ten months. In fact, if you omit the four months of pandemic distortion, this is the largest monthly increase in consumption in three decades. A scorching labor market and the receding pandemic appear to have cushioned the damaging impact of the highest inflation in a generation.

The US economy has given the Federal Reserve reason to hope that it will be healthy enough to withstand a heavy dose of inflation medicine over the next year. Current expectations in futures markets, and they change daily with tensions in Ukraine, call for five 0.25% hikes in the federal funds rate by the December 14 Federal Open Market Committee (FOMC) meeting. The first increase will come during the conclave on March 16, but the expectation of a quarter or half a point depends on the latest bulletins from Kyiv and Moscow.

American economy

Retail sales rose 3.8% in January, nearly double the consensus forecast of 2% and a sharp rebound from December’s revised 2.5% loss, initially of -1.9% . The control group jumped 4.8% last month, well ahead of the 1% estimate. The initial December release of -3.1% has been revised down to -4.

Retail sales


Sales are not adjusted for price changes. The consumer price index (CPI) rose 0.6% in January, providing a rough estimate of inflation’s contribution to sales figures.

Non-agricultural employment performed much better than expected in January. Employers hired 467,000 workers, triple the planned 150,000. More importantly, job creation in the fourth quarter almost doubled when corrected by the annual revisions of the Bureau of Labor Statistics (BLS). From 940,000 in the initial version, the BLS adjustments listed 1.894 million hires, 611,000 per month. The U.S. labor economy is still about 2.5 million short of its February 2020 level.

Wages were also well ahead of forecast. The average hourly wage (AHE) increased by 0.7% in January against 0.5% in December. Although annual wages increased by 5.7%, consumers lost 1.8% in purchasing power due to an inflation rate of 7.5%.

Average hourly earnings


Consumer sentiment in the Michigan survey fell to 61.7 in January, its lowest since October 2011 and well below the pandemic low of 71.8 in April 2020.

American consumers are the American economy, representing about two-thirds of GDP. January’s recovery in consumer spending after a 0.5% decline in the third quarter will come as a relief to Fed governors, indicating that inflation has yet to cause significant damage to consumer finances.

FOMC Minutes

The minutes of the January 26 FOMC meeting were a nod to the Fed’s new price awareness. Inflation was mentioned 73 times in the text, surely a record. Participants were recorded as favoring a significant reduction in the balance sheet given its “high level of holdings of Federal Reserve securities”. No suggestions were made as to the timing or extent of the planned reduction or whether it could be a passive reduction or active sales. No clue was provided to the prime market question, will the March rate hike be 0.25% or 0.5%.

In the higher rate environment, the Fed is keeping as many options open as possible.


A sustained decline in US consumption, whatever the source, could make it difficult, if not impossible, for a concerted Fed rate campaign against inflation. If consumers reduce spending, GDP falls and higher interest rates would quickly become unsustainable in a declining economy.

So far, US households have not retreated and the economy remains strong, growing 6.9% annualized in the fourth quarter. But inflation is a constant threat as it funnels discretionary spending into necessities. The tight labor market is the reason for consumers’ propensity to spend, even as wages steadily lose ground to inflation.

Treasury yields fell slightly from their recent highs, underscoring the main threat to the Fed’s rate program, the dispute between Russia and Ukraine.

Left to its own devices, the US economy should be able to maintain more than enough growth this year to allow for the Fed’s hikes. However, a Russian invasion of Ukraine would send oil and commodity prices skyrocketing and disrupt a still-fragile global recovery, most likely fomenting a US recession while fueling inflation.

The Fed has every reason to be wary of Ukraine and to cross its fingers.


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