QUICK MARKET
ANALYSIS

March 17, 2025 – Inflation easing and retail sales bouncing back provide some good news for the economy and help set the tone for the Federal Reserve’s meeting scheduled to take place later this week. It will be difficult, however, for the central bank’s officials to ignore the consumers’ pessimism and their persistent rise in inflation expectations observed in recent weeks. As of now, financial markets are betting that the Fed will leave the benchmark fed funds rate unchanged in the March meeting, but a 25-basis point rate cut in their May meeting is still a possibility.

 

Retail sales bounce back but at a slower-than-expected pace: U.S. retail sales rebound slightly in February after starting off the year with a sharp decline. American consumers spent 0.2% more last month than the prior month, but the increase was less than the 0.6% gain expected by economists. Overall spending on retail and food services in January was also revised downward to -1.2%, which was the biggest drop since 2021. Retail sales in February were dragged down by a pullback in spending at gasoline stations (-1.0%) and a slump in auto sales/car parts (-0.4%), but sharp declines at department stores (-1.7%) and restaurants (-1.5%) also contributed to weak sales last month. With the labor market staying healthy and wages increasing at a solid pace, growth in retail spending could remain in positive territory in March despite consumer pessimism about the future. Worries over economic growth will intensify, however, as the U.S. continues to engage in aggressive tariffs battles with its trading partners, and more pullbacks will likely take place in the second quarter if trade wars linger on.

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Inflation cools in February: The latest headline Consumer Price Index (CPI) went up 0.2% from the prior month and was up 2.8% from the same month of last year. The annual growth in price was the first deceleration after four straight months of increases and the 12-month change came in lower than consensus expectations of 2.9%. The headline CPI was moderated by a slowdown in energy and food prices, as gasoline prices dropped 1% month-over-month, while grocery store prices were flat from the prior month. Shelter costs’ growth continued to slow, with the annual increase up 4.2% from the prior year – the smallest gain since December 2021. Core CPI also slowed in February, up 3.1% on a 12-month basis and recorded the lowest reading since April 2021. Meanwhile, the Producer Price Index (PPI) released a day after the CPI report also provided some welcome news on inflation. February’s wholesale price growth came in lower than expected, with the headline PPI showing no gain for the month as compared to a 0.3% increase projected by economists. Prices for hospital care, insurance, and air fares remained elevated, however. Economists predict that the personal consumption-expenditure index (PCE) – the Fed’s preferred inflation gauge – could come in hotter than expected as inflation from those areas assert upward pressure on the PCE.

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Small business optimism falls as uncertainty rises: The NFIB Small Business Optimism Index in January dipped for the second consecutive month in February. At 100.7, the level of optimism for small business owners remained above the prevailing average for the past four years. Despite the index falling by 2.1 points last month, February’s figure remained above the 51-year average of 98 for the fourth consecutive month. While economic perceptions remained higher than what was observed in recent years, business sentiment continued to pull back last month as seven of the ten components that made up the optimism index dropped from the prior month. The Uncertainty Index rose again by four points in February and reached the second highest reading on record, as tariffs and layoffs in the government sector began to weigh on small firms. The expectation on the economy to improve lost 10 points from January, while the net percent who believed it is now a good time to expand dropped five points from the prior month. With trade wars likely to continue and escalate to a higher level in the near term, small business optimism could deteriorate further in coming months.

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Consumer sentiment dives to a 28-month low: U.S. consumer sentiment declined for the third consecutive month and plunged another 11% from February, according to the March’s Survey of Consumers released by the University of Michigan. The survey’s Consumer Sentiment Index slid to 57.9 from last month’s 64.7 and was the lowest reading since November 2022. Concerns about tariffs boosting prices and undercutting the economy were the primary factors in the deterioration in sentiment. Consumers’ year-ahead inflation expectation jumped to 4.9% in March, the highest level since November 2022. Long-term inflation expectations also surged from 3.5% in February to 3.9% in March, and the month-to-month increase was the largest observed since early 1993. As the Federal Reserve is about to meet later this week to discuss the direction of the fed funds rate, it would be difficult for them to ignore the persistent rise in inflation expectations.

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Foreclosure activity rises but remains muted: U.S. foreclosure activity increased from last month, as filings went up 5% month-over-month but declined 1.7% from a year ago, according to ATTOM’s latest U.S. Foreclosure Market Report. A total of 32,383 properties in the U.S. had a foreclosure filing status in February, which was significantly below the peak observed during the 2008 housing market collapse when filings exceeded 300,000 per month. At the national level, one in every 4,395 residential properties had a foreclosure filing in February, an increase from the prior month when one in every 4,618 units had a foreclosure filing. States with the highest foreclosure rates include Delaware, Illinois, Nevada, New Jersey, and South Carolina. With home prices expected to rise again in 2025 and assuming that the economy will not go into a recession, foreclosure activity should remain stable in the next 12 months.