Don’t underestimate the American shopper

New YorkCNN — 

It’s never wise to underestimate the power of the American consumer, which has kept America’s economy humming through a year and a half of inflation chaos.

A white-hot retail sales report Wednesday demonstrated the resilience of US shoppers in the face of rising prices. That could help companies continue to grow profit, even as high interest rates threaten to take a bite out of earnings, Bank of America told clients in a note.

Corporations are juggling an ever-growing collection of risks — rising wages, higher financing costs and inventory imbalances — but they’re still managing to keep profit margins strong, analysts wrote. That’s largely because of “nimble cost-cutting and US consumer resilience,” they said.

What’s happening: US retail sales grew in January by the most in almost two years, soaring 3% from December, the Commerce Department reported Wednesday. Economists had anticipated sales would rise by 1.8%.

Disposable income likely surged in January because of astonishing job growth, inflation-related adjustments to salaries in the New Year and an 8.7% increase in Social Security benefits that boosted spending among older households.

All that extra cashshould support strong spending through February and perhaps March, said Bank of America analysts.

While the retail sales number is not adjusted for inflation, Americans still appear to be indulging in a healthy dose of retail therapy despite ominous economic forecasts.

Consumer spending accounts for about 70% of America’s gross domestic product, the broadest measure of the US economy, so it’s nearly impossible for the economy to enter a recession as long as consumer spending is growing.

Bank of America lifted its estimates for first-quarter GDP to 2% from 1% on the back of Wednesday’s strong report,showing that shoppers are single-handedly keeping the US economy afloat.

The inflation problem: Low levels of unemployment and robust spending are signs of a thriving economy. That’s typically a good thing for Wall Street investors; but when the Federal Reserve is actively trying to squash high inflation rates, they risk becoming a fly in the ointment.

The high rate of spending could agitate investors in this good-news-is-bad-news economy because it adds to inflationary pressures. That means the Fed may use the strong data as an excuseto keep hiking interest rates.

Central bankers are already anxiously awaiting Thursday’s Producer Price Index inflation data after Tuesday’s Consumer Price Index report showed that inflation ticked up from December to January and annual inflation fell less than expected.

A slowdown in consumer spending could lead to recession down the road but most economists say that’s still a better outcome than the long-term pain that entrenched inflation could bring.

“January’s strong retail numbers are the most recent in a string of data that suggest that the economy should continue to expand in the near term,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “That also means that the Fed is likely to go even further to tighten conditions to achieve its policy goals. Recession risk may be deferred, but it certainly hasn’t dissipated.”

PPI, housing starts and bald spots: What investors are watching today

▸ Thursday morning brings two big data releases: The January Producer Price Index and housing starts.

PPI, which measures wholesale price growth, cooled off significantly in December. But that decline was fueled by falling energy prices, which dropped 7.9% in a single month, following a revised 3.2% decline in November. Excluding the often-volatile prices for food and energy, core PPI actually rose 5.5% over the year ending in December, and 0.1% compared to November.

That won’t be the case for January, as oil and gas prices have surged. Today’s report is expected to show a 0.4% rise in headline PPI and a 0.3% increase in core PPI between December and January, according to Refinitiv estimates.

When producers face input inflation, the increases in their production costs are passed on to retailers and consumers — so this data is considered a leading indicator of inflation.

▸ Housing starts, a measure of new home construction, have declined every month since August. Building permits, which track the number of new housing units granted permits, began falling in September.

That’s expected to end this month. Analysts polled by Refinitiv anticipate a seasonally adjusted 1.35 million permits in January, up from December’s 1.33 million. Housing starts are expected to decline slightly.

The construction industry is one of the first to go into a recession when the economy declines, but also one of the first to recover as conditions improve. Falling housing starts and permits could worsen the housing shortage, but an increase in starts signals a strong economy and could encourage the Federal Reserve to keep hiking interest rates.

▸ Olaplex, a beauty brand favored by TikTok and Instagram influencers (as well as the writer of this newsletter), sells hair products that dozens of customers allege caused “serious injury,” according to a lawsuit filed last week. Olaplex denies the claims, saying independent test results prove the allegations to be false.

Nearly 30 women joined together to file a lawsuit against Olaplex on February 9, specifically targeting its No. 0 to No. 9 products. They allege the products caused hair loss, breakage, brittle hair, bald spots and scalp irritation.

This isn’t the first time the brand has been engulfed in controversy around its ingredients. Last year, the brand’s popular No. 3. treatment was tweaked in response to concerns about a link to possible fertility dangers.

Shares of the stock fell slightly on Wednesday but are up nearly 25% year to date.

Here comes Goolsbee

The White House is considering tappingbrand-new Federal Reserve Bank of Chicago President Austan Goolsbee to serve as vice chair of the Federal Reserve’s board of governors, according to a Wall Street Journal report.

Goolsbee has had a whirlwind start at the central bank. He was appointed to lead the Chicago bank just last month. Before that he was a top economic adviser to former President Barack Obama and a professor of economics at the University of Chicago’s Booth School of Business.

If selected, Goolsbee would be fillingthe hole left by Federal Reserve Vice Chair Lael Brainard, who submitted her resignation late Tuesday and will leave the bank next week to serve as director of the National Economic Council.

While Brainard was one of the least hawkish policymakers at the Fed, Goolsbee — who has not spoken publicly about his monetary views since joining the Fed — has in the past said that there is no limit to how high the Fed’s rate could go.