Last week’s limited economic data showed that consumers may be taking a break from spending, at least for the moment. Given a smaller-than-expected bounce back in confidence and a disappointing retail sales report, we need to keep an eye on whether consumer spending will continue to drive economic growth.
Overall, though not terrible, last week’s subpar results mean we should dial back our expectations for the economy until we see if this is just a blip (as I suspect it is) or something more severe.
Last week’s data: consumers getting nervous?
The University of Michigan Consumer Sentiment Index ticked up slightly, rising from 90 to 90.4, below expectations for an increase to 91.5. Although the index remains at a healthy level, the shortfall was largely due to a drop in the current conditions sentiment to a five-month low, which was surprising and disappointing. At the same time, however, future expectations increased on new stock market highs, rising house prices, and declines in gasoline prices, suggesting further gains are likely.
More important, the retail sales report also fell short. Retail sales were flat in July, well below expected growth of 0.4 percent. Meanwhile, the previous month got an upward revision, from growth of 0.6 percent to 0.8 percent, but sales growth was still below expectations. The shortfall was due almost entirely to auto sales, which increased by less than expected. Removing the volatile auto and gasoline sectors, core retail sales did even worse, with a decline of 0.1 percent against an expected increase of 0.3 percent.
Taken together with the consumer confidence numbers, the retail sales report suggests consumers are taking a breather. Although these numbers are disappointing, we must remember that they follow a run of very strong (and unsustainable) gains from April to June and represent only a small giveback of some of those gains. Given that, this is probably a one-month adjustment rather than a more serious decline. It does bear watching, however.
The week ahead
This week features a much wider range of reports, starting with housing. Today, the National Association of Home Builders survey is expected to tick up from a healthy 59 to an even better 60, as builders are encouraged by falling inventory.
Housing starts follow on Tuesday and are expected to remain essentially flat or drop slightly.
Also on Tuesday, we'll see inflation data. With gas prices dropping again, headline consumer prices are expected to be flat for the month and up only 0.9 percent over the previous year, down from increases of 0.2 percent and 1 percent, respectively, the previous month. Core prices, which exclude energy and food, are expected to grow by 0.2 percent on the month and 2.3 percent on the year, the same as the prior month.
Industrial production, also released on Tuesday, should continue its rebound, with an increase of 0.2 percent expected for both manufacturing and the industrial sector as a whole. This would be a decline from the previous month, but there is some upside risk here given rising energy activity. In any event, continued growth, even at lower levels, is good news.
Finally, on Friday, the minutes from the most recent meeting of the Federal Open Market Committee will be released. With speculation over a September rate hike rising, the minutes will be closely scrutinized for hints of the Fed’s intentions. Although Janet Yellen’s speech later this month will be the main event, if there is anything startling here, markets could react.
Have a great week!