January strength unlikely to last

The resurgence in activity and employment in January means that there is little chance of the economy falling into recession in the first quarter and we now expect GDP growth of 1.5% annualised. That said, the retail sales data in particular appear to be distorted by seasonal adjustment problems, while the unseasonably mild weather also gave the economy a temporary boost, although that may not be unwound for another month or two. Even if there are reasons to be sceptical of the apparent January resurgence, however, there is no getting away from the fact that the economy is holding up better than we had expected. Alongside the stubbornly-high CPI inflation readings for January, there is now a clear risk that the Fed will raise interest rates a little higher over the coming months than we had previous thought. But with most leading indicators – including the Conference Board’s index, which fell further in January – still pointing to renewed economic weakness to come, we think it’s still too soon to expect a much higher peak in interest rates.