Today’s data comes close to wrapping up data collection for the second quarter of 2019, and imply that the consumer sector has robustly rebounded from a weak first three months of the year, while overall industrial production remains tepid at best.
Based on the 0.4% increase on the month and a 1.8% increase on a year-ago basis in retail sales, we are revising up our second-quarter GDP forecast from 1.4% to 1.6%. Without a doubt, consumer spending put a floor under overall economic activity during the second quarter of the year, despite what looks to be a quarter of weak business investment and overall industrial production.
A strong month of e-commerce spending, outlays on motor vehicles and parts, as well as economic activity at eating and drinking establishments underscore a rock-solid consumer sector that should provide cover for the economic headwinds from the external sector and domestic manufacturing.
Because the data from month to month are quite noisy, we prefer to smooth it out to ascertain trends in overall consumer activity. The control group, which feeds into the estimate of GDP, on a three-month average annualized pace increased 7.5%, which is the primary cause of our upward revision to GDP.
Just as impressive were outlays at non-store retailers, a proxy for e-commerce sales: They are up 1.7% on a month-over-month basis, and 11.6% from a year ago. In this portion of the economy, one person’s retail apocalypse is another’s dynamic transformation. In our estimation, this is undeniably the most positive aspect of the monthly retail report.
Equally impressive was the increase in outlays at eating and drinking establishments which were up 0.9% month over month and 3.2% year over year. It’s undeniably a great time to be operating in that industrial ecosystem and it’s good to see Americans getting out and enjoying the late innings of the business cycle. It is equally pleasing to see the data reflect what one is observing around the economy without a lag.
June industrial production was flat and increases a tepid 1.3% on a year-ago basis. While the 3.6% decline in demand for utilities slightly over-exaggerated the weakness in overall industrial production, the increase in motor vehicle assemblies on the month is likely not to be sustained. Thus, excluding auto assemblies, industrial production fell 0.2% on the month and is up a soft 1.2% on a year-ago basis. Excluding motor vehicle parts, manufacturing grew at a 0.2% pace monthly and on a year-ago basis.
At this point, the U.S. manufacturing sector will do well to avoid contraction in 2019, given the growing external headwinds and uncertainty around trade policy.
