Underlying retail sales showed a strong increase in June while industrial production posted another sharp drop, giving mixed signals on the health of the economy heading toward a pivotal period for rate hike decisions.
Both data points, released by the government on Tuesday, are key factors in the GDP estimate for the second quarter. The mixed signals did not change our forecast of a 1.7% increase in GDP on a quarterly annualized basis, which will be released by the end of this month.
The data also did not change our expectation for another 25-basis-point hike next week by the Federal Reserve, which is basically a done deal by now.
On the surface, consumer spending at retail stores, online and in restaurants slowed to 0.2% in June, according to the Census Bureau on Tuesday.
The slowdown was driven by some of the most volatile categories like autos, gasoline and building materials, whose prices saw significant declines in recent months as disinflation continued to work through the economy.
As inflation concerns have eased somewhat, especially for energy prices, American consumers can now spend more on non-discretionary items.
Excluding those volatile categories, the control group—which feeds into GDP estimates and better represents underlying spending strength—grew faster on the month at 0.6% from 0.3% earlier in May. That was equivalent to a robust 2.1% increase for the group on a three-month moving average annualized pace.
We think enough spending power remains to push American consumers through the summer with excess savings ranging from $500 billion to $670 billion by the end of the second quarter.
July should be another strong month for retail sales; Amazon reporting another record-breaking Prime Day is one indicator. June’s online sales were one of the biggest drivers for total sales that month, rising 1.9% month-over-month.
There were still some weak spots in the retail space. Spending on food and beverage services dropped 0.7% in June, the third drop in four months, likely due to the consistent increases in dining out prices. Sales at department stores fell a sharp 2.4% in June and 5.7% from a year ago.
Industrial activities also showed some weakness in June, which saw a monthly decline of 0.5% for two months in a row. Similar to May’s data, all components dropped in June with manufacturing down 0.3%, utilities down 2.6% and mining down 0.2%.
Clearly, the industrial sector has been under a lot more stress than other sectors of the economy.
Notably, consumer goods production fell a sharp 1.3% in June, following a 0.5% decline in May. As businesses often stock up their inventories a few quarters ahead of time, we are likely on track for a slower fourth quarter, when we expect spending should slow or even decline materially.