Retail Sales Optimism; Disappointing Chinese Data Raises Concerns

Yesterday’s?retail sales report buoyed optimism the U.S. consumer and by extension the U.S. economy, can continue to withstand a backup in rates as the Fed continues its fight against inflation.?

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Yesterday,?retail sales rose 0.7% in July, the largest monthly gain since January and following a 0.3% increase the month prior (revised higher from the 0.2% gain initially reported). According to the median estimate on?Bloomberg, sales were expected to rise 0.4%. Year-over-year, retail sales rose 3.2% in July, up from the 1.6% annual rise in June.

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Car sales fell 0.3% in July following a 0.7% gain the month prior, while gasoline stations sales increased 0.4%. Excluding autos, retail sales rose 1.0% in July and climbed 2.2% over the past 12 months. Excluding autos?and?gasoline, retail sales rose 1.0% and increased 5.3% year-over-year.

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The retail sales control group (excludes food services, auto dealers, building materials and gas station sales), which goes into the GDP calculation, rose 1.0% in July and 5.0% over the past 12 months, the largest annual gain since February.

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In the details of the report, health and personal care sales rose 0.7%, food and beverage sales gained 0.8%, and clothing sales rose 1.0% in July. Also, building materials sales rose 0.7%, and general merchandise sales gained 0.8% due to a 0.9% increase in department store sales. Additionally, eating and drinking sales rose 1.4%, sporting goods sales increased 1.5%, and non-store retailer sales rose 1.9% in July.

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On the weaker side, miscellaneous sales decreased 0.3%, electronics sales declined 1.3%, and furniture sales dropped 1.8% in July.

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Bottom Line:?A significantly stronger-than-expected July retail sales report perpetuates the notion of the ongoing resiliency of the consumer and more broadly, the U.S. economy. Of course, on a longer-term basis, the consumer continues to lose momentum with the annual pace of expenditures slowing from 7.4% at the start of last year to 3.2% as July. Furthermore, the volatility in retail spending has picked up more recently as consumers become increasingly choosy and price sensitive, shifting the goods and services in their basket, something they do – something we do as consumers – when we’re increasingly concerned about our financial footing.?

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That being said, it is clear,?for now, the consumer is continuing to find alternative means to supplement spending with a rise in credit card debt, a massive increase in hardship withdrawals from 401ks, a drawdown in savings and a last sputtering of state and local stimulus. Of course, these factors are not indefinite and with housing payments and student loan payments ramping up or retuning for many, coupled with rising prices and higher borrowing costs, while the consumer is unlikely to fall off a cliff, there appears to be mounting pressure ahead, eventually resulting in a more sizable downturn in activity – a welcome scenario for the Federal Reserve.?

But while yields remain elevated in anticipation of both a stronger economy and a more robust monetary policy response, the equity market appears to be rattled by the most recent disappointing data from overseas, suggesting possible global contagion.??

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5-year yields are trading at 3.45% and the 10-year is at 4.21%.

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Yesterday, equities dropped an average 1.1%. Although this morning, equities?are rebounding?somewhat with the Dow up 0.5% and the S&P 500 up 0.2% as of 9:52 a.m. ET.

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As a key component of the economy, without a strong and healthy consumer, the broader economy will suffer, a scenario already playing out overseas.?The Chinese economy appears to be faltering as the data indicate a sizable miss in a number of vital sectors.?According to National Bureau of Statistics (NBS), industrial output?grew 3.7% in July from the year prior, slowing from the 4.4% annual gain in June and below the median forecast of 4.4%. Also, retail sales rose 2.5% in July from a year ago, down from the 3.1% annual gain in June and the weakest pace since December 2022. Additionally, urban unemployment rose from 5.2% to 5.3% in July. Youth unemployment, specifically, which wasn’t reported in July, rose to 21.3% in the latest June report, a record high.??

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According to Treasury Secretary Janet Yellen, the mounting weakness in China is a?“risk factor”?for the US.?“China’s slowdown will have the largest impact on its Asian neighbors, but there will be some spillovers to the United States,”?Yellen told reporters following a speech in Las Vegas.??

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This morning,?housing starts rose 3.9% in July, pulling the annual pace up from 1.398M to 1.452M, a two-month high. Starts were expected to rise 0.9%, according to the median forecast on?Bloomberg. Single family starts increased 6.7%, while multi-family starts fell 1.7%. Year-over-year, housing starts rose 5.9% in July following a 10.4% drop in June.

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Building permits, meanwhile, ticked up 0.1% in July, pulling the annual pace up from 1.441M to 1.442M, also a two-month high. Building permits were expected to rise 1.7% in June, according to?Bloomberg. Single family permits rose 0.6%, while multi-family permits declined 1.0%. Year-over-year, building permits declined 13.0% in July following a 15.3% decrease in June, and marking the twelfth consecutive month of decline.

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Bottom Line:?Month-to-month volatility aside, construction activity has broadly waned over the past two+ years, falling into net negative territory as of May 2022. While some renewed activity has helped to arrest a further downward trajectory, new construction activity is expected to remain somewhat minimal over the medium term.

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Also, yesterday, import prices rose 0.4% in July, more than the 0.2% gain expected and following a 0.1% decline in June. Export prices, meanwhile, jumped 0.7% in July, surpassing the 0.2% increase expected and following a 0.7% drop the month prior. Over the past 12 months, import prices fell 4.4%, the sixth consecutive annual decline, and export prices dropped 7.9%, also the sixth consecutive annual decline.

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Additionally yesterday, the Empire Manufacturing Index plunged from +1.1 to -19.0 in August, a three-month low. According to the median forecast, the index was expected to decline to -1.0.?In the details of the report, prices paid rose from 16.7 to 25.2, a three-month high, and prices received increased from 3.9 to 12.6 in August, also a three-month high. Additionally, inventories rose from -10.8 to -9.7, and the six-month general business conditions index increased from 14.3 to 19.9, the highest reading since March 2022. On the other hand, the number of employees dropped from +4.7 to -1.4, and new orders declined from 3.3 to -19.9, a three-month low.

Finally, yesterday, the NAHB Housing Market Index unexpectedly dropped six points a reading of 50 in August, a three-month low.

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Also this morning, industrial production rose 1.0% in July, surpassing the 0.3% gain expected and following a 0.8% decline the month prior.

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Capacity utilization, meanwhile, ticked up from 78.6% to 79.3% in July.

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Later today, the July FOMC meeting minutes are scheduled to be released 2:00pm ET.

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Tomorrow, initial jobless claims are expected to decline from 248k to 240k in the week ending August 12, the Philly Fed Index is expected to rise from -13.5 to -10.0, and the Leading Index is expected to decline 0.4% in July following a 0.7% decrease the month prior.

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-Lindsey Piegza, Ph.D., Chief Economist