Consumer spending up, if you buy the stats

INDICATOR: July Retail Sales/Import Prices

KEY DATA: Retail Sales: +0.2%; Excluding Vehicles: +0.5%/Imports: +0.2%; Non-Fuel: -0.4%

IN A NUTSHELL: "Consumers are still spending but not with a whole lot of conviction."

WHAT IT MEANS: So, is the consumer happy, depressed or just getting by? The answer is not totally clear right now. Retail sales rose in July even as vehicle demand moderated a touch. But the report was so inconsistent that it is hard to figure out what is in the minds of households. For example, shoppers bought lots of soft goods such as clothing, general merchandise, food - at home and at restaurants -, gasoline, health care products and even sporting goods. But when it came to big-ticket items, they were quite cautious. Spending on not only vehicles but also furniture, electronics and appliances was off. People didn't fix up their homes much as sales at building materials and garden stores tanked. As for the internet, it doesn't look like a whole lot of people were surfing the net for bargains either. In other words, lower priced products were in, higher cost goods were out.

On the inflation front, there was good news. Outside of oil-related products, the prices of foreign products entering the country were down or at worst flat, pretty much across the board. Vehicle and consumer goods prices fell led by declines in manufactured products. Industrial material costs were off even including the sharp increase in petroleum products. And capital goods prices were up, but minimally. The only concern, if you can call it one, was a rise in food. Most of it was in prepared products, sugars and confectionary items in particular.

MARKETS AND FED POLICY IMPLICATIONS: The consumer is still the focus of attention given the continued concerns about the tax increases and modest wage gains. As I have been saying for years now, the lack of income growth has to change before household spending and ultimately overall economic growth can improve. The retail sales numbers don't indicate a confident consumer. People are still spending but not shopping 'till they drop or even 'till they're tired. They are just shopping. The key to third quarter growth, which I expect to be above 2%, will be big-ticket purchases. Durables added about one-half percent to growth in the spring without any help from vehicles. That has to hold if not improve if growth is to pick up and this report does not give me a lot of confidence that will happen. This should also be a warning to the Fed that the consumer is not ready to shoulder the burden of keeping growth going. Whether that matters to the inflation paranoids on the FOMC is anyone's guess but if you consider that the declining import prices imply inflation pressures should remain minimal, there really is no reason to start to taper on September. The hope that tapering may not start right away could be a factor in the markets' relative stability but if the Fed does move next month, it will be interesting to see if investors maintain their confidence in growth and earnings.