US data review and GDP tracker update - Nomura

Analysts at Nomura offered a review of the US data and their GDP tracker update.

Key Quotes:

"Core (“control”) retail sales, excluding food services, autos, building materials and gasoline increased modestly by 0.1% m-o-m in February, below expectations (Nomura: 0.7%, Consensus: 0.4%), following a flat reading in January. Weaker-than-expected retail sales in February and January suggest consumer spending could moderate from notably strong growth in Q4. However, given the strong labor market, recent tax cuts, and elevated consumer sentiment, we maintain that the momentum in consumer spending will remain steady in the near term.

PPI: Headline PPI increased 0.2% m-o-m in February, slightly higher than the market consensus forecast of 0.1%. While volatile components such as food (-0.4%), energy (-0.5%) and trade (-0.2%) all declined in the month, "core PPI" which excludes those components was up firmly by 0.4% m-o-m. Among services, air transportation of freight (+1.5%), airline passenger services (+1.9%) and traveler accommodation services (+3.7%) made positive contributions to core PPI. However, metrics for pipeline inflation were mixed overall as non-food intermediate processed goods prices excluding energy rose by 0.7% m-o-m while non-food unprocessed goods prices excluding energy dropped by 0.3% m-o-m. As for elements that are relevant for February’s core PCE price index, several components rose steadily. Hospital prices rose 0.4% and portfolio management services prices increased by 1.2%. In addition, scheduled passenger air transportation prices increased 2.0%. We think that detailed components of PPI appear positive to core PCE inflation. Taken altogether, we now expect a 0.2% (0.212%) m-o-m increase in the core PCE price index in February.

Business inventories: Business inventories increased 0.6% m-o-m in January, in line with expectations. Moreover, inventory accumulation in December was revised up modestly. Autos and parts inventories in January jumped sharply by 1.7% after four consecutive monthly declines. In addition, inventories for wholesalers increased strongly by 0.8% while manufacturer inventories increased modestly by 0.3%. Inventory investment, while volatile, will likely contribute strongly to Q1 real GDP growth, with our tracking estimate currently showing a 1.1pp contribution.

GDP tracking update: Core retail sales in February were weaker than we expected. Moreover, PPI data relevant to the core personal consumption expenditure (PCE) price index rose steadily in February and are positive to core PCE price inflation, in our view. The updated PCE inflation forecasts and incoming core retail sales data suggest a slight slowdown in real PCE growth in Q1 from the strong pace in Q4. However, weaker real PCE growth could mean weaker imports, suggesting less drag from net exports on Q1 real GDP growth. In addition, weaker real PCE could lead to increased unintentional inventory buildup. However, firm increases in PPI for intermediate goods in February, which we use to deflate various components of nominal inventories, likely dampened the contribution to Q1 growth from real change in inventories. Altogether, we lowered our Q1 real GDP tracking estimate by 0.1pp to 1.6% q-o-q saar."