First tier economic data so far for January has been more positive than anticipated for first-quarter GDP growth. We had expected a more subdued January with a bounce in activity from stalled November-December to come later in February and March, but the January data now sets a high level for the GDP--a sizeable implication for overall first-quarter growth. That means our forecast for 0.8% quarter-over-quarter annualized growth is likely going to be understating the strength for the quarter.

There are three concurrent reasons for the upside surprise during the month. First, January saw a milder-than-usual weather boost to economic activity. Second, COVID-19 infection numbers steadily declined at a faster-than-anticipated pace following the October-December surge. Third, stimulus checks from the December COVID-19 relief bill hit pockets in early January.

But what weather giveth, it also taketh away. It now appears bad weather is on track to make February a weak month for activity. Some of what was gained in January will be taken away in February as large swaths of the country have seen weather-related shut-ins--especially in the South and Southeast, which contribute the largest to overall U.S. growth. Texas alone is over 8% of U.S. GDP.

We had no doubt data was going to be quite noisy these first three months, with monthly data susceptible to one-off swings. In fact, that is likely going to be the case until we put COVID-19 behind us. Federal Reserve policymakers indicated the same in their minutes to the Jan. 26-27 Federal Open Market Committee (FOMC) meeting released this week. The minutes emphasized the need for consistent messaging that monetary policy will remain loose until there are clear signs that the economy has moved past the pandemic.

When would we see such signs? A clearer picture may emerge by the end of the second quarter (assuming COVID-19--old and new variants--tempers). There has been a lot of good news of late. Congress is likely to pass a near $2 trillion fiscal package that will put money in the pockets of Americans. That will improve the financial situation of many who have been hurting because of the pandemic and allow for an even stronger recovery once the health crisis passes.

Before the bad winter weather this week disrupted vaccinations across large swaths of the country, the U.S. was administering over 1.8 million shots per day a week ago, and already 12.1% of the total U.S. population had been vaccinated with at least one dose, according to federal data collected by the Centers for Disease Control and Prevention. Over 41 million folks have received one or more doses of vaccine as of Feb. 19.

Additional fiscal stimulus in the pipeline and progress in inoculations pull forward the timing of that economic bounce-back to as early as this spring. Against such economic backdrop, we anticipate the Fed will announce in summer its new forward guidance on when the tapering of asset purchases will begin.

Chart 1

Housing Permits Point To Sustained Growth For Construction

Even as housing starts declined 6.0% January, they remained robust at a 1.580 million pace, following December's climb to a 14-year high of 1.680 million (was 1.669 million) from a 1.54 million average per month in November and October. Most notably, housing permits--which is the forward-looking indicator of ground breakings to come--jumped in January by 10.4%, led by the multifamily component, to their highest level (1.881 million annualized) since May 2006. The early February homebuilders index ticked back up to 84.

Chart 2

The rise in permits counterbalanced lower starts in January to extend the solid trajectory of the housing sector through the first of the month, though we'll likely see a big weather hit in February. Housing activity is particularly apt to be affected by weather (and consumer spending won't be spared either, although states reopened restaurants and bars at some capacity in February, which should offset some of the weather-related drag).

Consumers On A Shopping Spree

No sector saw a bigger bump than we anticipated than retail sales. Retail sales (including sales of food services) rose 5.3% month over month in January, which was five times higher than consensus expectations. To be sure, it did come on the heels of three consecutive months of decline during the fourth quarter of last year.

Every store type posted gains in January, with most retailers seeing the largest gain in sales since the summer. Overall sales are now 7.8% above pre-pandemic levels even as sales in department stores and restaurants and bars remain 9.6% and 16.4% below pre-pandemic levels, respectively.

Nonstore retailers (e-commerce) continued to gain with January near a record of 11%. Since last year, e-commerce is up 28.7%, the largest year-over-year gain of any retail category. For every dollar spent at U.S. retailers in January, 15.5 cents were spent online--markedly up in a short time compared with the pre-pandemic share of 12.9 cents. The increased activity in the housing sector has also mapped well onto retail sales of building material and home furnishings.

Chart 3

Chart 4

Control retail sales (excluding gasoline stations, food services and drinking places, building materials, and auto sales), which factor directly into GDP, jumped by 6.0% month over month, its first increase since September, placing it on track to increase by 15.9% quarter over quarter annualized in the first quarter following a 2.4% annualized decline in the fourth quarter.

Chart 5

Although retail sales have long exceeded pre-pandemic levels, consumption in a broad range of services is still 2.6% below. We expect the release of pent-up demand and the massive cumulative excess in household savings (an estimated $1.5 trillion to $1.6 trillion through December) to boost services consumption once conditions normalize midway through the year.

Chart 6

Favorable Tailwinds For Industrial Production Despite Auto And Weather Hiccups

Strength in domestic demand (outside of pandemic-affected services) has mapped well onto industrial production.

Industrial output was up for a fourth consecutive month in January, led by a solid 1% jump in manufacturing, despite a decline in motor vehicle production, which constitutes a large weight in overall manufacturing activity. Auto production has declined in five of the last six months as supply shortages constrain the sector. (These declines are exacerbating the inventory shortages at auto dealers, placing further upward pressure on prices.)

To be sure, outside of the disruption in motor vehicle production, industrial production faces headwinds from inclement weather and power outages in the month. Mining, which rose for a third consecutive month by 2.3% in January as rebounding oil prices incentivized stronger energy activity, also largely falls in the path of the storms. Still, any dip is likely going to be temporary, with a solid trajectory beyond February as the inventory cycle and oil prices now above $60 will keep machines and drilling humming.

The Philly Fed headline and component readings together with big Empire State headline and component gains create a solid path for sentiment of manufacturers into February (see table 1). The figures are consistent with the rapid output growth of a rebuild in inventory.

Chart 7

While the recent deep freeze is poised to disrupt industrial production in February and shortages of materials will weigh on production in the auto sector in the near term, we expect industrial production to keep rolling more broadly through the year. Rising oil prices will lift drilling activity from lows, and the aircraft and parts sector will benefit from more favorable conditions following cyclical lows the last couple of years (with the pandemic and MAX737 regulatory freeze). Businesses will continue to replenish inventories following strong recoveries in goods consumption and business equipment investment (which are already above pre-pandemic levels).

Table 1

Table 2