Retail Sales Surprise to the Upside, While Inflation Continues to Slow Toward 2-Percent Target

Key Takeaways:

• Retail sales and food services rose 1.0 percent in July, though the previously flat reading in June was revised downward to a 0.2 percent contraction, according to the Census Bureau. Part of the gain was due to a 3.6 percent surge in motor vehicle and parts dealers sales, which was a rebound from June’s figure that was suppressed due to a software hack that affected car dealerships. Still, gains were relatively broad based, with furniture and electronic/appliance stores (+1.0 percent) building material, garden equipment and supply dealers (+0.9 percent), general merchandise stores (+0.5 percent) and nonstore retailers (+0.2 percent) all registering gains. Control group retail sales (excluding food service, auto, building supplies, and gas station sales) increased 0.3 percent, following a robust 0.9 percent gain in June.
• The Consumer Price Index (CPI) increased 0.2 percent over the month in July and 2.9 percent compared to a year prior, the lowest annual inflation rate since March 2021. Excluding food and energy, core CPI was up 0.2 percent over the month, bringing the annual rate to 3.2 percent, also a cycle low. Core goods prices were down 0.3 percent over the month, led by a 2.3-percent decline in used vehicle prices. Shelter prices rebounded somewhat after a cool reading the month prior as rent rose 0.5 percent, and owners’ equivalent rent was up 0.4 percent.
• The Producer Price Index (PPI) increased 0.1 percent over the month in July, bringing the year-over-year comparison down five-tenths to 2.2 percent. Core PPI (less food, energy, and trade services) was a bit higher, rising 0.3 percent over the month and 3.3 percent compared to a year prior.
• Industrial production, a gauge of output in the manufacturing, utility, and mining sectors, declined 0.6 percent in July and was revised downward in June, according to the Federal Reserve Board. Manufacturing activity declined 0.3 percent and the previously reported 0.4 percent gain in June was revised to a flat reading. Mining output was flat and utilities output, which is highly dependent on the weather, fell 3.6 percent.
• Housing starts declined 6.8 percent to a seasonally adjusted annualized rate (SAAR) of 1.2 million, the lowest level since the onset of the pandemic. Single-family starts were down 14.1 percent to a SAAR of 851,000, while the highly volatile multifamily starts rose 14.5 percent to 387,000. Single-family permits declined just 0.1 percent to a SAAR of 938,000, while multifamily permits were down 11.1 percent to a SAAR of 458,000.
• The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index declined 2 points to 39 in August. The index for single-family sales in the present declined 2 points to 44, while the index for sales in the next six months rose 1 point to 49. The index for the traffic of prospective buyers declined 2 points to 25.

Forecast Impact:

The above-consensus retail sales figure helps assuage growth slowdown fears that developed following the weak July labor report. While part of the headline figure was supported by volatile auto sales figures, control group retail sales, which feed directly into estimates of personal consumption expenditures, suggest that consumption will likely remain relatively strong through the third quarter. On the inflation front, the CPI and PPI reports add further evidence that price gains are slowing toward the Fed’s 2-percent target. While measures of shelter surprised to the upside, we continue to believe this category will decelerate over time based on measures of newly signed leases. Core CPI ex shelter, an important category given the lagged nature of how shelter prices are measured, was flat over the month and only increased 1.7% compared to a year ago. This report is consistent with our forecast for a 25-basis point cut in September, given that it has evidence of continued cooling but not an abrupt slowing that may signal something more ominous. Still, much will likely depend on next month’s labor report, and the weakness in the industrial production report does highlight the risks of elevated rates affecting the real economy.

The sharp fall in single-family starts in July was almost certainly weather-related. Single-family starts in the South, where more than half of single-family building occurs, dropped 23% to their lowest level since the onset of the pandemic, likely due to the effects of Hurricane Beryl. This is further supported by an essentially flat reading in single-family permits. Short-term volatility aside, we continue to expect a bit of a slowing trend in single-family starts this year, consistent with permits previously tracking below starts. Further, a growing inventory of new homes for sale that are already completed or under construction are likely to delay new projects until they can be sold.

Nathaniel Drake
Economic and Strategic Research Group
August 16, 2024

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