Retail Sales Stronger Than Expected, Claims Fall to Lowest Since July

This morning, retail sales rose 1% in July, more than double the expected increase, and a significant improvement from a -0.2% lull in June. Year-over-year, retail sales rose 2.7%.

In the details, ten of the report’s 13 categories posted gains including a sizable rebound in car sales (+3.6%) following last month’s cyberattack on auto dealers, electronics sales (+1.6%), food and beverage sales (+0.9%) and e-commerce (0.2 %). Gasoline sales also gained for the month (+0.1%) following two consecutive months of decline.

Excluding autos and gasoline, retail sales rose 0.4% in July, double expectations, and 3.4% year-over-year. Meanwhile, control group sales increased 0.3%, also surpassing the 0.1% rise anticipated, and 3.7% over the past 12 months.

Bottom Line: A stronger than expected retail sales report in July underscores the ongoing resilient nature of the American consumer. Despite indications of a somewhat cooler labor market, high prices and elevated borrowing costs, consumers continue to spend, although the pace of expenditures has slowed from earlier peak levels. That being said, the question remains whether or not relatively reduced levels of hiring are a reflection of a normalization process or more precipitous weakness to come, potentially compounding pressure on households.

For now, consumer activity continues to be a solid support to growth with second-quarter GDP gaining significant momentum and Q3 growth on track to near 3%, according to the Atlanta Fed’s GDPNow model. Although fears of a weaker jobs market and the potential negative impact on consumer spending continue to play a key role in the market’s expectations for Fed policy action sooner than later potentially distracting from the Committee’s focus on achieving prices stability.

Also, this morning, initial jobless claims fell for the second week in a row, down 7k to 227k in the week ending August 10th, the lowest level since early July.

Continuing claims, or the number of Americans receiving unemployment benefits, also declined to 1.86M in the week ending August 3rd.

Yesterday, the CPI rose 0.2% in July, as expected and following a 0.1% decline in June. Year-over-year, consumer prices rose 2.9%, a tenth of a percentage point below expectations and down from the 3.0% annual increase in June.

Food prices rose 0.2%, while energy prices were unchanged following a 2.0% decline in June. Excluding food and energy costs, the core CPI rose 0.2% in July, as expected and following a 0.1% gain in June. Year-over-year, the core CPI increased 3.2%, down from the 3.3% annual gain in June and the slowest pace in since April 2021.

In the details of the report, shelter prices rose 0.4% with a similar gain in OER (Owners’ Equivalent Rent), both marking the largest gains in two months. Also, other goods and services costs rose 0.2%, and recreation prices increased 0.1% in July following a similar rise the month prior. Additionally, education and communication prices rose 0.2%, the most in three months.

On the other hand, transportation prices fell 0.1%, due to a 0.2% decline in new vehicle prices and a 2.3% drop in used cars and trucks prices. Additionally, airline fares declined 1.6%, marking the fifth consecutive month of a decline. Additionally, medical care prices fell 0.2%, and commodities prices slipped 0.1% in July.

Another iteration of inflation, the supercore – defined as core services excluding housing – rose 0.2% in July following a 0.1% decline the month prior. Over the past 12 months, the supercore increased 4.4%, down from the 4.6% annual increase in June and the smallest annual gain in five months.

On Tuesday, the PPI rose 0.1% in July, a tenth of a percentage point less than expected and following a 0.2% gain the month prior. Year-over-year, producer prices rose 2.2% in July, down from the 2.6% annual gain in June and marking the smallest annual increase since April.

Food prices rose 0.6% and energy prices increased 1.9% in July following two consecutive months of decline. Excluding food and energy costs, the core PPI was flat (0.0%), the smallest reading in seven months and following a 0.3% rise in June. Yearover-year, the core PPI increased 2.4% in July, down from the 3.0% annual gain in June and the smallest annual increase in three months.

Excluding food, energy and trade, however, producer costs rose 0.3%, the largest monthly gain in three months. Over the past 12 months, the PPI excluding food, energy and trade rose 3.3%, the hottest reading since May.

Additionally, services costs fell 0.2%, due to a 1.3% decline in trade costs. Transportation and warehousing costs, however, rose 0.4% at the start of the third quarter.

Bottom Line: A cooler-than-expected headline CPI coupled with another month of waning producer price pressures further strengthens the argument for a near-term rate reduction in the federal funds rate as inflation slowly moves closer to the Committee’s 2% target. There remain, however, some notable points of concern in the July data regarding a sustainable disinflationary trajectory, including an uptick in the ex-trade component of the core PPI, a hefty increase in the OER, taking the shelter component in the CPI to a two-month high, as well as a stubbornly elevated level in the supercore, still more than double the Committee’s target.

Of course, details aside, if the more favorable headline descent is confirmed by the July PCE report released on August 30, even the skeptics among the Committee are going to find it difficult to fend off the Doves ready to initiate liftoff towards a less firm policy stance. That being said, with the data still volatile and bumpy, even amid another month of broadly improving conditions, the pace of rate cuts is likely to be very slow and tempered, disappointing investors’ expectations for a rush back to neutral, let alone an accommodative stance.

Speaking of policy easing, New Zealand's central bank is the latest to reduce its benchmark rate, opting to cut its official cash rate by 25bps from 5.50% to 5.25% in a surprise move Tuesday. After raising rates from an earlier low of 0.25%, this marks the first cut since March 2020 and comes nearly a year ahead of schedule, according to the central bank’s own forecast. The decision follows earlier rate cuts by the EU, U.K. and Canada, as the Fed continues to deliberate over the timing for its first move.

Also yesterday, MBA mortgage applications jumped 16.8% in the week ending August 9 following a 6.9% increase the week prior. The 30-year mortgage rate, meanwhile, fell by 1bp to 6.54%.

Tomorrow, July housing starts are expected to decline 1.4% and building permits are expected to fall 1.5%. Additionally, the preliminary University of Michigan Consumer Sentiment Index is expected to tick up from 66.4 to 66.9 August, potentially marking a two-month high.

-Lindsey Piegza, Ph.D., Chief Economist