February 17, 2025 – The economy kicks off the year with some splits in its fundamentals, but the overall condition remains healthy in general. Retail sales pulled back after a strong year-end performance but a rebound in the next couple of months is likely. Consumer prices surged more than expected but January’s wholesale price growth suggests that the inflation fear might be overblown. Small business optimism slipped but the latest index figure remained above the prevailing average for the past four years. One thing is likely true for 2025: Uncertainty will be the theme this year and we will need more time to see how everything plays out.

Retail sales pull back after strong year-end gains: U.S. retail sales started the year with a slump as consumers tightened their belts after splurging at the end of 2024. Overall spending on retail and food services in January dropped 0.9% from the prior month, a much bigger decline than consensus expectations of -0.2%. The sharp drop in sales was the largest one-month dip in nearly two years, and the weakening in sales was broad-based. While the slump at the beginning of 2025 could be an indication that the economic growth is softening and will potentially slow further in coming months, the slip in retail sales could also just be a pull-back in consumer spending after a strong pull-forward during the holiday season. Retail sales in December, in fact, were revised upward from a 0.4% increase to a 0.7% jump, and the monthly increase climbed by at least 0.6% every month from September to December. With January’s retail sales showing a year-over-year increase of 4.2%, the latest data continues to suggest solid consumer fundamentals. As such, a rebound in overall spending in the next couple of months is a possibility.

Consumer prices surge in January but producer prices tame the market: The latest headline Consumer Price Index (CPI) went up 0.5% from the prior month and was up 3.0% from the same month of last year. The annual growth in price was the 4th consecutive month of increases in inflation and the 12-month change was the strongest since June 2024. The increase was broad-based, with shelter costs increasing 4.4% from a year ago and auto insurance prices surging nearly 12% year-over-year. Core CPI inched back up last month after dipping for the first time in four months in December, and the latest monthly figure came in hotter than the estimated 0.3% gain. Meanwhile, the Producer Price Index (PPI) released a day after the CPI report suggests a slightly more benign inflation picture. While the wholesale price growth came in higher than expected for January, some details of the report – such as health care costs and domestic airfares’ prices – indicated that the pipeline inflation pressure continues to ease. Taken the two reports together, economists believe the personal consumption-expenditure index (PCE) – the Fed’s preferred inflation gauge – should come in a bit closer to the January’s target.

Small business optimism slips after four monthly gains: The NFIB Small Business Optimism Index in January dipped for the first time in five months. At 102.8, the level of optimism for small business owners remained above the prevailing average for the past four years. Despite the index falling by 2.2 points last month, January’s figure remained above the 51-year average of 98 for the third consecutive month. The post-election sentiment, while continuing to stay upbeat, pulled back for seven of the ten components that made up the optimism index. The movement in the Uncertainty Index was particularly noteworthy, as it increased 14 points to 100 and reached the third highest reading of all time. The surge in the index could be attributed to recent announcements on tariffs, which might have created concerns for some owners on their businesses’ outlook. The expectation on the economy to improve also dropped five points from December, while the net percent who believed it is now a good time to expand fell slightly by three points from the prior month. With more announcements expected to surface in coming months on changes in regulations and tax cuts, more fluctuations in the optimism will likely be observed in the next 12 months.

Consumers split on labor market expectations and worry about future household finance: Results from the New York Fed’s Survey of Consumer Expectations suggest that consumers’ expectations on the labor market were mixed. The likelihood of losing one’s job in the next 12 months increased 2.3 percentage points to 14.2% in January, but the mean perceived probability of finding a job if one’s current job was lost also increased by 1.3 percentage points to 51.5%. Meanwhile, respondents also expected a one-year-ahead earnings growth rate of 3% in January, an increase of 0.2 percentage points from the prior month. As far as spending is concerned, consumers expected their median household spending a year from now to increase by 4.4%, a decline of 0.4 percentage points from last month, and it was the lowest reading since January 2021. More consumers also expected their financial situation to deteriorate 12 months from now, as the share who believed their household finance to get worse increased 1.1 percentage points to 21% in January from 19.9% in December.     

Construction spending ends 2024 with an encouraging note: U.S. construction spending in December inched up from the prior month and increased solidly from 12 months ago. For the year as a whole, the value of construction in 2024 rose 6.5% to $2,154.4 billion from $2,023.7 billion in 2023. Residential construction spending continued to rise for the third straight month and climbed 1.5% from the prior month, with single family construction up 1.5% month-over-month, while multifamily construction remained sluggish with a dip of 0.3% from November. On a year-over-year basis, both single-family (-0.8%) and multifamily (-10.5%) outlays continued their declining trends in December. With single-family starts and permits bouncing back at the end of last year, construction spending for the sector should remain healthy in early 2025. Multifamily outlays, on the other hand, will likely stay muted in at least the first half of 2025.

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