Retail Sales Is Counterprogramming the Job Report
Retailers increased sales more than twice as fast as the consensus had estimated in July. That is true whether describing headline retail sales (+1.0% vs. 0.4% expectation) or the measure that excludes autos and gas (+0.4% vs. 0.2% expectation). Perhaps the most remarkable development though is that control group sales, a favored tool for predicting PCE spending in the GDP report, increased 0.3% in July. Coming on the heels of a 0.9% gain in the prior month, the upshot is more solid goods spending than most forecasters, ourselves included, had expected.
Less than two weeks ago, broad-based weakness in the July jobs report sent global financial markets into a tailspin and re-ignited fears of U.S. recession. (…) Today’s retail sales report is the latest development on this theme. That spending momentum in July positions spending for a solid third quarter. (…)
Source: U.S. Department of Commerce and Wells Fargo Economics
As was widely expected, the place where sales picked up the most was the largest category: auto dealers. A slump in June set up July for a solid gain of 3.6%. This is made somewhat more impressive by the fact that the CPI report showed auto prices are actually down over the past year. Some old familiar friends have returned to auto dealerships to help move inventory including more attractive financing terms, manufacturer rebates and dealer incentives.
Elsewhere, stores reported broad-based gains across most store types. The only categories that were down were clothing, sporting goods and miscellaneous. If one were to judge only from consumer company earning announcements, little of this makes sense. (…)
Labor market data have grown in importance as the Fed has shifted its focus back to the jobs market, and by extension the health of the consumer matters. Even though inflation and employment are the sole mandates, the Fed cannot afford to look past consumer behavior.
Source: U.S. Department of Commerce and Wells Fargo Economics
We’ve long held the view that continued consumer resilience depends on income growth as savings are no longer in excess and access to affordable credit has dwindled. With retail sales having held up through July, it somewhat walks back the urgency for an aggressive Fed pivot. Yet retail sales are limited in their growth signal as they mostly cover goods consumption and are subject to large monthly revisions. The more comprehensive personal income and spending report out later this month will be key to gauging consumer resilience, but the July retail report was a positive economic development. It’s the latest reminder that its tough to bet against the US consumer.
This was indeed a strong report confirming that the American consumer keeps buying goods, setting the stage for a possible reversal of the “weakish” June employment report.
My proxy for retail inflation (0.35 CPI-Durables + 0.65 CPI-Nondurables) was –0.01% MoM in July after –0.5% in each of the previous 2 months. If so, real sales rose 1.0% MoM in July following +0.7% in May and +0.3 in June.
This is booming demand!
Can this make sense given consumer companies conference calls apparently complaining of slow demand?
Part of the reason may be that many companies fail to adequately monitor prices and volumes.
Another reason is that the media have emphasized the weaker comments. Here’s Goldman Sachs on its own monitoring:
Similar to previous quarters, several companies have noted that consumers of their products remain under pressure from the macroeconomic environment and that this pressure has led to weaker sales. This experience is not universal, however, as other companies continue to see resilient consumer spending. Two common points of discussion that have also persisted this quarter relate to the affordability or value of a company’s offerings and the disparities between consumers in low vs. high income cohorts.
Yesterday, Walmart’s CEO Doug McMillon said “So far, we aren’t experiencing a weaker consumer overall.” He should know, including about the lower rung of the income spectrum. Notice that he said “so far”, which includes the first half of August for which he‘s got daily numbers.
- “Things have been remarkably consistent — I know everyone is looking for some pieces of information that maybe indicates further weakness with our members and our customers. We’re not seeing it,” CFO John David Rainey later added.
Of the 71 S&P 500 consumer centric companies having reported Q2 by August 9, 69% beat earnings estimates, by 5.4% on average. Consumer Staples missed their revenue estimates by 0.5% to +1.6% but Consumer Discretionary companies grew revenues 4.7%, 0.8% better than forecast. Walmart actually raised its revenue guidance yesterday.
Also yesterday, initial claims fell for the second consecutive week, by 23,000 in total to 227,000 for the week ended August 10 and continuing claims also fell 7,000 to 1.864 million in the week ended August 3. The mini-summer seasonality seems alive increasing the odds that July’s weakish employment report was due to temporary factors.
Goldman Sachs’ survey of conference calls reveals that “Company commentary this quarter regarding hiring plans and the labor market largely reflects a healthy labor market.”
But if demand for goods is so strong, why is manufacturing not stronger and why are goods prices deflating?
One, because the vast majority of goods Americans consume are imported. U.S. real imports of goods are up 5.3% YoY in Q2 and 20% from their pre-pandemic level.
Two, because imported Chinese goods have deflated 3.8% since Q2’22 and, although they stopped falling in February, they have yet to show any uptick through July.
U.S. based goods-producing sector has seen no benefit from booming retail sales post-pandemic.
In all, higher interest rates did not reign spending in like in previous such episodes but inflation slowed mainly because goods have been deflating, mainly thanks to China.
As shown yesterday, overall import prices have recently stopped deflating along with shipping costs. And we might get higher tariffs this fall.
Maybe, the two most important inflation indicators for the U.S. are Chinese domestic demand and the USD.
China’s faltering growth revives cash vouchers talk
(…) A top-level policy meeting in July pledged an incremental tilt towards consumer stimulus, in what analysts saw as an official admission the previous toolkit wasn’t working as intended.
An article in state media this week revived an idea implemented in the United States and elsewhere during the pandemic but resisted in Beijing.
China Daily, citing three economists from government-backed think tanks, said the government “should consider additional direct support to consumers worth at least 1 trillion yuan ($139 billion) — either cash or vouchers.”
That sum is equivalent to 0.8% of last year’s GDP. (…)
Li Daokui, director of Tsinghua University’s Academic Center for Chinese Economic Practice and Thinking, was quoted as saying “it was advisable” that the consumption coupons be issued during the week-long National Day break in October. (…)