With markets expecting the Federal Reserve to pivot to rate cuts in September, investors were looking to this week’s release of economic data to reaffirm their expectations.
But the new data, including Friday’s retail sales figures, has not made it any easier for the Fed to shift to rate reductions.
Most of the data moved in the wrong direction that would support a rate reduction.
For example, retail sales rose, but industrial production fell, while consumer sentiment dropped because of higher inflation expectations, according to data released on Friday.
A lot is happening in the economy, but one trend has become clear: The economy is slowing but not enough to guarantee a rate cut when inflation is increasingly becoming a concern.
Retail sales
Retail sales rebounded in July, the second straight monthly increase. But it is hard to contribute the entire increase to still-resilient American consumers when there remains so much uncertainty.
A good chunk of the increase can be attributed to the rising prices of imported goods under the impact of tariffs.
We also can’t deny entirely the scenario that consumers once again pulled ahead their spending in July before the August tariff deadline to capitalize on seasonal events like Prime Day and early back-to-school shopping.
For example, the sharp increase in furniture sales looked a lot like consumers front-running tariffs.
Read more of RSM’s insights on the economy and the middle market.
We agree that there is nothing fundamentally wrong with American households that could lead to a spending recession. That consumers could pull ahead their spending to avoid tariffs means that they were in a good position financially to support such a major change in spending habits.
But with so much noise within the data, a wild and bumpy ride is likely to continue for the remainder of the year.
Together with rising inflation, if we are correct that some of the increase was because of advance spending, which will stop once tariffs are in place, overall growth in the second half should closely follow our forecasts of around 1.1% economic growth on an inflation-adjusted basis.
Industrial production and consumer sentiment
Industrial production volume fell by 0.1% in July while consumer sentiment dropped sharply to 58.6 from 61.7 in August.
Most important, inflation expectations from the public rose in August, putting some more pressure on the inflation outlook.
