July Retail Sales and Wholesale Prices
Economics in a nutshell: “The consumer paused in July and with price pressures soft, the Fed members will probably gain a few more grey hairs.”
INDICATOR: July Retail Sales and Wholesale Prices
KEY DATA: Productivity: -0.5%; Labor Costs: +2%/ NFIB: +0.1 point
IN A NUTSHELL: "The consumer paused in July and with price pressures soft, the Fed members will probably gain a few more grey hairs."
WHAT IT MEANS: The consumer has been the rock on which the economy has depended for its modest growth. Well, it looks like households went on a July vacation. Retail sales went nowhere and even that result was due largely to solid vehicle demand. Excluding that segment, demand declined. The spending malaise spread across the economy. Clothing, gasoline, food both at home and away, building materials, general merchandise, electronics and appliances all posted declines. We did buy a lot online and some more furniture, but that was it. Core sales, which best mirror the GDP numbers on consumption and exclude gasoline, vehicles, building materials and food services, were flat as well. That said, these data are not price-adjusted. We know that gasoline prices were down and it wouldn't be surprising if clothing costs also dropped. So don't write off the consumer just yet.
If soft consumer spending was not enough of a concern for the worrywarts at the Fed, they also have to deal with soft wholesale prices. Producer costs were down in July, led by drops in both food and energy. Excluding those components, prices still went nowhere. Even services, which had been rising sharply, posted a decline. It's hard to explain this sudden turnaround, so we need to be a little cautious in the interpretation of the numbers. It should also be noted that the path from producer prices to consumer prices is not straight and often a dead end. Looking forward, there is some pressure at the intermediate level for services and some goods, so future reports may not look this weak.
MARKETS AND FED POLICY IMPLICATIONS: Consumer spending has been robust and once in a while, households do cool their spending. Since this has been a really warm summer, spending on air conditioning is likely to be high and that is in the services component, not retail sales. So don't assume that there will be a weak third quarter consumption number just because a non-price adjusted retail sales report came in below expectations. Still, the Fed members are afraid to come out from under their rocks until growth is sustainably solid and inflation in near or at their target, and today's reports don't provide them with any comfort that will happen soon. As for investors, they should be concerned about the soft consumer demand but happy about a Fed on hold. Which one drives the markets is anyone's guess, but as an investor, I would really like to see better profits that are driven by stronger sales.
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