In the most important report of the week, retail sales were right in line with expectations, posting an increase of 0.6 percent for July—a big jump from the prior month’s decline of 0.3 percent, which was revised up to flat. Control group retail sales, which exclude autos, gas, and building materials, were up by a more modest 0.3 percent, but that also represented an increase from the prior month’s initial estimated decline of 0.1 percent, which was revised up to a gain of 0.2 percent.
The combination of stronger performance and upward revisions to previous months suggests that consumers continue to be freer in their spending, despite economic and geopolitical turbulence.
Housing also showed steady progress. Mortgage delinquencies dropped from 5.54 percent to 5.30 percent, and foreclosures fell from 2.22 percent to 2.09 percent. Although they are backward-looking, these stats signal that consumers continue to improve their financial positioning.
Consumer confidence was generally solid, with the University of Michigan Consumer Sentiment Index dropping slightly, to 92.9 from 93.1. The decline appeared to be at least partially attributable to rising gas prices, as the expectations subindex dropped. Consumer sentiment remains well above the average level of 86.0, and current levels indicate continued economic growth.
On the business side of the economy, industrial production rose by 0.6 percent—twice the expected gain. This is most likely due to a surge in auto production, a distortion that’s very likely to be reversed next month. Good news, but not something to get too excited about, especially in light of the poor Empire State Manufacturing report (more on that below).
The Week Ahead
Manufacturing: Surprising analysts this morning, the Empire State Manufacturing Survey came in at −14.9, its lowest level in some time, down from +3.9 in June. If it holds, this could signal trouble for the production sectors of the economy. That may not happen, though, as the six-month index actually rose, and these surveys tend to be very volatile.
I’ll be keeping an eye on the Philadelphia Fed's manufacturing index on Thursday to see if it shows a similar decline. As with the industrial production number mentioned above, this is something to watch but not get too concerned about just yet.
Housing: Key reports this week include housing starts on Tuesday and existing home sales on Thursday, both of which are expected to show modest gains. The National Association of Home Builders survey also comes out today and should reflect continued confidence in the industry.
Inflation: Consumer price inflation is expected to increase, although a slower growth rate than last month is likely. Gasoline prices ticked up in July, and decreasing apartment vacancy rates most likely increased the rent figure used in the CPI calculations. Expectations are for an increase of 0.2 percent month-on-month and 1.8 percent year-on-year, which remains below what the Federal Reserve wants to see.
Fed meeting: Minutes from the most recent meeting of the Federal Reserve will be released on Wednesday. Investors will be reading them closely for clues as to whether the Fed will raise interest rates in September. Expectations are that employment growth is robust enough and inflation high enough for the Fed to do just that, so markets will be poised to react to any indicators that a rate hike is less likely.
Energy: Two key energy reports are also on this week’s agenda. Oil prices are becoming important factors in the stock market, and the Wednesday inventory report from the U.S. Energy Information Administration, along with Baker Hughes Rig Counts on Friday, may well move the markets.