INDICATOR: August Retail Sales, Industrial Production and Import and Export Prices
KEY DATA: Sales: +0.1%; Ex-Vehicles: +0.3%/ IP: ++0.4%; Manufacturing: +0.2%/ Import Prices: -0.6%; Nonfuel: -0.1%; Exports: -0.1%; Farm: +0.2%
IN A NUTSHELL: “We are starting to see a slow cooling in growth as consumer spending and manufacturing activity are moderating.”
WHAT IT MEANS: Today’s data dump provides some clear indications about the economy in the third quarter. The news is good, but as expected, not as great as it was in the second quarter. Take consumer spending. Retail sales rose minimally in August, but the headline is misleading. July sales were revised upward and taken together, the two months imply spending remained solid – just not as great as in the spring. A sharp drop in vehicle purchases was largely offset by a jump in gasoline sales, which were hyped by rising prices. Clothing purchases look like they were off significantly, but with prices falling significantly, they were likely flat on a price-adjusted basis. We did buy lots of stuff online, though. All told, August retail sales were probably largely flat, when inflation is factored in, but July’s were up sharply.
Manufacturing had been leading the way but that may be ending. While industrial production jumped in August, manufacturing output rose only moderately. Despite the softening in demand, vehicle assembly rates hit their highest pace since March. Don’t expect that to continue. There was a jump in business equipment production, an indication that business investment may be picking up. But it was a surge in utility and energy activity that created that big rise in overall output. The hot August weather undoubtedly was key for utilities. That implies consumer spending on services was likely strong. So expect August consumption to be solid – just not on goods.
There was really good news on the inflation front as import prices cratered in August, helped along by a large drop in energy and petroleum related costs. Oil prices have been rising this month, so don’t expect that decline to be sustained. Automotive, consumer and capital goods prices were essentially flat over the month. On the export side, the tariff-related farm price drop eased, but non-agricultural exporters had essentially no pricing power.
MARKETS AND FED POLICY IMPLICATIONS: The economy continues to hum along. It’s just that the standards are misplaced. Touting the 4% second quarter growth rate creates expectations that are simply unsustainable. It looks like third quarter growth will be closer to 3.25%. That is really solid, though when you consider it is occurring in a massive governmental stimulus environment, you have to wonder what comes next. The economy was going gangbusters in the middle of 2014, expanding at a 5% pace. But the collapse of oil prices and the energy sector in 2015 brought that rapid expansion to a halt by the second half of 2015. That is a cautionary tale that few discuss as it gets us into the political arena of highlighting the strong growth during the Obama administration. But the data are the data and we need to ask what could cause a deceleration in growth this time. Obvious answers are negative effects from tariffs, rising energy costs, a weakening housing market and the tailing off of the tax cut impacts. What could keep it going? Stronger business capital spending and greater wage increases that sustain solid consumer demand. We shall see over the next year which factors dominate. As for now, the strong growth will almost certainly lead to a rate hike announcement on September 26th and probably December 19th. And since I think any slowdown will likely be in the form of a moderation than an abrupt end as we saw in 2015, look for more rate increases next year.
Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.
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