Data_Note: Is the U.S. economy hitting a soft spot?

A number of indicators have come in not-so-great, but way too soon to conclude anything.

The recent dataflow has raised some concerns:

But I’m here to tell you that it’s too soon to ring any alarm bells for two main reasons.

First, one month does not a new trend make. January retail sales slumped to the downside, but it’s a noisy indicator and it follows four months of solid numbers. Consumers are still in good shape, with buying power lifted by still solid labor markets and real wage gains.

Second, there have been one-off factors that should be taken into account, factors that say more about a measurement issue than the true economic signal. Sales were dented in January by unusually cold weather (key word: “unusual,” as normal weather issues are controlled for using seasonal adjustments).

Similarly, the disinflationary trend has stalled somewhat in recent reports but I agree with the Fed that inflation should soon start trending down to its target level of around 2%. The January CPI was sticky, but as I pointed out earlier in the week, some of that was a function of certain components, like car insurance, catching up to earlier price hikes. Also, there’s some evidence that in recent years, the January inflation rate has been biased up a bit by firms repricing their inventory in the new year (why that’s not picked up by the seasonal adjusters is a deep question). [In the weeds: there’s also reason to believe that the inflation gauge the Fed watches most closely, the PCE deflator, will come in softer for January than the CPI did.]

Finally, the underlying economy is still strong, so when you see GS downgrade their Q1 real GDP forecast, remember that 2% is still a solid growth rate, high enough to keep job creation percolating along and unemployment low.

Of all the above, I gotta say that I’m the most concerned about reigniting inflation. It’s a low-probability risk but that risk is up a bit. Trump tariffs push the wrong way on price pressures, of course, and the high and growing chaos-driven uncertainty could create an environment where price setters (firms, markets, producers) get spooked enough to dislodge their inflationary expectations. If that’s right, and the Fed catches a whiff of it, they’ll justly hit back hard, moving from pausing to raising interest rates.

Again, not likely, but we’re in a climate where big things can break.