Fed raises rates as prices rise, but rest of economy seems mediocre

I've been tied up with March Madness and the festivities that come with it, but there was a slew of economic data that hit in the later part of this week that I wanted to catch up on.

One of those pieces of data was February's retail sales information, which indicated a slowdown for at least the last month.

U.S. retail sales in February posted the smallest gain in six months, indicating a tempering of the consumer spending that’s been carrying the economy.

Purchases rose 0.1 percent, matching the Bloomberg survey median estimate, after a 0.6 percent increase in the prior month that was stronger than previously reported, Commerce Department figures showed Wednesday. Just four of the 13 major retail categories saw gains in February sales.

Estimates for retail sales in the Bloomberg survey ranged from a 0.3 percent decrease to a 0.5 percent advance. The January reading was previously reported as a 0.4 percent rise.

The figures used to calculate gross domestic product, which exclude categories such as food services, auto dealers, home-improvement stores and service stations, rose 0.1 percent. That followed the prior month’s 0.8 percent increase in the so-called retail control group.

And the mediocre retail sales figures look even paler when followed up with this week's release of the February numbers for the Consumer Price Index. While the Bureau of Labor Statistics says that consumer inflation was relatively tame in February itself, January's CPI increase was 0.6%, meaning that real retail sales haven't increased at all in 2017. In addition, the year-long trend of inflation continued to go up, reaching its highest level since March 2012.

The all items index rose 2.7 percent for the 12 months ending February; the 12-month increase has been trending upward since a July 2016 trough of 0.8 percent. The index for all items less food and energy rose 2.2 percent over the last 12 months; this was the fifteenth straight month the 12-month change remained in the range of 2.1 to 2.3 percent. The energy index rose 15.2 percent over the last year, while the food index was unchanged.

12-month CPI, 2011-2017

The increase in inflation also ate into the earnings of American workers, and while there was a slight increase in real earnings in February due to the tamer inflation, but January's 0.6% increase in inflation still leaves workers behind for 2017 so far. And over the last year, the average American worker hasn't gained anything.

Real average hourly earnings for all employees increased 0.1 percent from January to February, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This result stems from a 0.2-percent increase in average hourly earnings combined with a 0.1-percent increase in the Consumer Price Index for All Urban Consumers (CPI-U).

Real average weekly earnings increased 0.1 percent over the month due to the increase in real average hourly earnings combined with no change in the average workweek.

Real average hourly earnings were unchanged, seasonally adjusted, from February 2016 to February 2017. The unchanged real average hourly earnings combined with a 0.3-percent decrease in the average workweek resulted in a 0.3-percent decrease in real average weekly earnings over this period.

With these numbers in mind, the Federal Reserve Bank raised interest rates this week another 0.25%, and Federal Reserve Chair Janet Yellen said that the fact that the US economy was near full employment and still gaining jobs allowed them the latitude to tighten money.

"We have seen the economy progress over the last several months in exactly the way we anticipated," Yellen said in a press conference following the end of a two-day policy meeting. "We have some confidence in the path the economy is on."

The Fed also stuck to its outlook for two additional rate increases this year and three more in 2018. The central bank lifted rates once in 2016.

Stock markets extended gains and bond yields fell on the benign economic outlook and the continued steady path of rate rises signaled by the central bank. The dollar was trading lower against a basket of currencies.

Fed policymakers noted that inflation was now "close" to the central bank's 2 percent target, and that business investment had "firmed somewhat" after months of weakness.

However, they did not flag any plan to accelerate the pace of monetary tightening, with the policy-setting committee reiterating and Yellen emphasizing that future rate increases would be "gradual." At the current pace, rates would not return to a neutral level until the end of 2019.

I'm a little more skeptical of the strength of the economy, because of these limited wage increases and retail sales being mediocre, but I do think it's nice that savers will get a little more from their investments in coming months, because God knows they haven't gotten much in recent years.

The bigger question to me is when the lack of earnings and numerous retail store closings start to bleed over into other parts of the economy, and start to prick and deflate the Trump Bubble we are seeing on Wall Street. It needs to be sooner than later, before the damage becomes too great to avoid hurting large amounts of people.