Implications:  After posting the best year in a decade in 2017, housing starts surprised to the upside in January, beating even the most optimistic forecast by any economics group.  Starts rose 9.7% in January to a 1.326 million annual rate, the second fastest post-recession pace.  It is important to note that while single-family starts did rise in January, 74% of the month's gain was due to the volatile multi-unit sector.  But, looking past monthly volatility, single-family starts are still the main driver of trend growth, as the chart to the right shows.  The horizon also looks bright for future activity, with permits for new construction, the number of units authorized but not started, and units currently being built all sitting at post-recession highs.  Notably, this has all happened despite a significant uptick in mortgage rates in the past year, which some analysts claimed would derail the housing recovery.  Based on population growth and "scrappage," housing starts should eventually rise to about 1.5 million units per year.  And the longer this process takes, the more room the housing market will have to eventually overshoot the 1.5 million mark.  Although tax reform trimmed the principal limit against which borrowers can take a mortgage interest deduction to $750,000 versus the current law amount of $1 million, the law only affects new mortgages.  In addition, large reductions to marginal tax rates in the early 1980s, which reduced the value of the mortgage interest deduction, coincided with a rebound in housing.  In other words, we don't expect the changes in the deduction to cause problems for the housing industry at the national level, although we do expect some shift in building toward regions with lower taxes and land prices.  In other recent housing news, the NAHB index, which measures homebuilder sentiment, remained unchanged at 72 in February, a historically elevated level signaling strong optimism from developers.  On the inflation front, import prices jumped 1% in January while export prices rose 0.8%.  In the past year, import prices are up 3.6% while export prices have increased 3.4%, reinforcing other recent data showing a rising trend in inflation.

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Implications:  Industrial production started 2018 on a soft note, falling for the first time in five months.  The headline series declined 0.1% in January.  However, this is not the end of growth in the industrial sector.  Industrial production is still up 3.6% from a year ago.  The biggest drag in today's report was mining, which dropped 1% and can be very volatile from month to month.  Remember, January's ISM manufacturing report posted its strongest level for that month in seven years.  As a result, we expect a rebound in industrial sector growth in the months ahead as tax reform spurs investment, and stronger growth, both in the U.S and abroad, gives a tailwind to the factory sector.  Meanwhile, although mining has dropped the past two months, it's still up 8.8% from a year ago.  Notably, oil and gas-well drilling stumbled in January, falling 1.4%, after a rebound of 0.9% in December.  Even though drilling slowed in the second half of 2017, most likely associated with hurricanes Harvey and Irma, it remains up 30.1% from a year ago.  In addition, the rig count has surged in recent weeks, suggesting a rebound in drilling activity in the months ahead.  In other factory news this morning, the Empire State index, a measure of manufacturing sentiment in New York, dropped to a still healthy 13.1 in February from 17.7 in January.  Meanwhile, the Philly Fed index, its counterpart among East Coast manufacturers, jumped to 25.8 in February from 22.2 in January, signaling growing optimism.

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Implications:  Producer prices jumped in January, rising 0.4% as nearly every major category showed increased prices.  And producer prices are up 2.7% in the past year, exceeding the Fed's 2% inflation target.  This follows suit with yesterday's CPI report that shows inflation pressures have been picking up of late, and it's not difficult to see why.  The Federal Reserve is running an incredibly loose monetary policy.  Yes, the Fed Funds rate is slowly and steadily on the rise, but there are still more than two trillion dollars of excess reserves in the banking system, and monetary policy won't be tight until that excess slack is removed.  This is especially true because anti-bank attitudes and regulation have been reversed, which reduces the headwinds to monetary growth.  To put it mildly, new Fed Chair Jerome Powell and the rest of the FOMC have their work cut out for them.  Taking a look at the details of today's PPI report shows rising costs for hospital services, apparel, and gasoline leading the way.  Energy, led by a 7.1% jump in gasoline prices, increased 3.4% in January.  Meanwhile food prices declined 0.2% in January.  Strip out the typically volatile food and energy groupings, and "core" producer prices rose 0.4% in January and are up 2.2% in the past year.  For comparison, "core" prices rose 1.4% in the twelve months ending January 2017, and were up 0.8% in the twelve months ending January 2016.  And a look further down the pipeline shows the trend higher should continue in the year to come.  Intermediate processed goods rose 0.7% in January and are up 4.6% from a year ago, while unprocessed goods increased 0.9% in January and are up 2.5% in the past year.  Both categories have seen a pickup in price increases over the past six and three-month periods.  Given these figures, and with employment growth remaining strong and inflation rising, we expect four rate hikes in 2018.  On the jobs front, initial jobless claims rose 7,000 last week to 230,000, while continuing claims rose 15,000 to 1.942 million.  Both measures remain near the lowest levels seen in decades, so look for another solid jobs report in February, although heavy snow in parts of the country might put some temporary downward pressure on payrolls for the month.  If so, don't fall into the trap of thinking the good times are over.  Job gains should rebound in the following months.

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Implications: Retail sales fell well short of expectations in January and were revised down for November and December.  Overall, a dismal report relative to expectations that have improved with growing optimism about the economy.  Retail sales in January itself declined 0.3%, versus the consensus expected gain of 0.2%.  As a result, it now looks like real GDP grew at a 2.3% annual rate in the fourth quarter instead of the original report of 2.6%.  In addition, it also looks like real GDP is growing at about a 3.0% annual rate in Q1 versus our prior estimate of 4.0%.  That said, today's report has more to do with the timing of economic growth; it does not alter our general optimism about an acceleration of growth in 2018.  At present we estimate that real GDP will grow 3.4% this year, which would be the best year since 2003.  It is not unusual for retail sales to fall three or four months in a year, even during periods of robust growth.  January was one of those months.  Hurricanes in the second half of last year pulled some sales forward. It makes sense that autos and building materials were the largest decliners in January, as hurricane victims were fixing and replacing houses and buying new cars at a rapid clip late last year.  As we get back to normal, expect retail sales to resume their trend higher in the months to come.  Even with today's decline, both overall retail sales and "core" sales, which exclude autos, building materials, and gas, are up a respectable 3.6% from a year ago.  Why are we optimistic about retail sales growth in the months ahead?  Jobs and wages are moving up, tax cuts are taking effect, consumers' financial obligations are less than average relative to incomes, and serious (90+ day) debt delinquencies are down substantially from post-recession highs.

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Implications:  New Fed Chief Jerome Powell has his work cut out for him, with consumer prices in January rising at the fastest monthly pace in more than five years.  The consumer price index rose 0.5% in January and is up 2.1% in the past year, marking a fifth consecutive month of year-to-year prices rising more than 2%.  In the past three months, CPI is up at a 4.4% annual rate, showing clear acceleration above the Fed's 2% target.  A look at the details of today's report shows rising prices across most major categories. Energy prices increased 3% in January, while food prices rose 0.2%. But even stripping out volatile food and energy prices shows rising inflation.  "Core" prices rose 0.3% in January, the fastest monthly pace since 2005.  Core prices are up 1.8% in the past year, but are showing acceleration in recent months, up at a 2.6% annual rate over the past six-months and a 2.9% rate in the past three months.  In other words, both headline and core inflation stand above the Fed's 2% target, and both have been rising of late.  Housing costs led the increase in "core" prices in January,  rising 0.2%, and up 2.8% in the past year. Meanwhile prices for services rose 0.3% in January and are up 2.6% over the past twelve months.  Both remain key components pushing "core" prices higher and should maintain that role in the year ahead.  The most disappointing news in today's report is that real average hourly earnings declined 0.2% in January.  However, these earnings are up 0.8% in the past year. And, given the strength of the labor market, with the unemployment rate at the lowest level in more than a decade and headed lower, paired with a pickup in the pace of economic activity thanks to improved policy out of Washington, expect upward pressure on wages in the months ahead.  Add it all up, and the Fed is on track to raise rates at least three times in 2018, with a fourth rate hike more likely than not.

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Source: St. Louis Federal Reserve FRED Database