Recovery Continues, Though Retail Sales Growth Decelerates and Consumers Remain Pessimistic About Future Economic Conditions
- Retail sales and food services increased 1.2 percent in July, according to the Census Bureau, a slowdown in growth from the prior two months. Retail sale volumes (not adjusted for inflation), however, surpassed the prior peak seen in January and both June and May sales were revised upward. The gain was driven by sales at gas stations, electronics and appliance stores, and clothing and accessory stores. Sales at building supply stores fell 2.9 percent, the largest decline since February 2019. Core retail sales (excluding food services, auto, building supplies, and gas stations) rose 1.4 percent.
- Nonfarm business productivity jumped 7.3 percent annualized in Q2 2020, the largest increase in 11 years, according to preliminary estimates by the Bureau of Labor Statistics. However, the headline jump was tempered by details of the report. Total hours worked fell by a record 43.0 percent annualized, back to levels not seen since the end of 2010, and fell further than real output, which only declined by a record 38.9 percent annualized. Unit labor costs increased 12.2 percent annualized, the largest increase in just over six years.
- Industrial production, a gauge of output in the manufacturing, utility, and mining sectors, rose 3.0 percent in July, though it remains 8.3 percent below February levels, according to the Federal Reserve Board. Manufacturing output increased 3.4 percent, the third straight month of increase. Mining output edged up 0.8 percent, the first increase since January, and utilities output rose 3.3 percent, driven by unusually warm temperatures.
- The Consumer Price Index (CPI) increased 1.0 percent from a year ago in July, an acceleration of four-tenths from the prior month. Core CPI (excludes food and energy prices) rose 1.6 percent, also an acceleration of four-tenths from the prior month and the fastest annual pace of growth since March.
- The National Federation of Independent Business (NFIB) Small Business Optimism Index fell 1.8 points in July to 98.8, the first decline since April. The share of firms expecting the economy to improve fell 14 percentage points to 25 percent, and the share of firms expecting real sales to increase fell 8 percentage points to 5 percent.
- The University of Michigan Consumer Sentiment Index edged up in the preliminary August reading, rising three-tenths to 72.8. Both the consumer expectations index and the current economic conditions index were little changed. According to the press release, "Bad economic times are anticipated to persist not only during the year ahead, but the majority of consumers expect no return to a period of uninterrupted growth over the next five years."
The partial rebounds in economic data that we saw in June appear to have slipped heading into July. The deceleration in July retail sales suggests the increase in coronavirus cases across the country dampened spending; however, the increase in retail sales still aligns with our expectation of a strong rebound in consumer spending in the third quarter. The increase in industrial production supports our expectation for an increase in Q3 business investment. The stabilization of oil prices likely means further gains in mining output over the coming months and may lead to more investment in structures as oil/gas rigs are brought back online. We believe the increase in Q2 nonfarm business productivity is somewhat misleading, as it was due to a larger decline in hours worked and a slightly smaller decline in output. As the labor market continues to recover in Q3, we expect this relationship will likely return to a more “normal” level. Risks to the outlook remain, highlighted by the decline in July small business sentiment, as well as consumer sentiment's August decline.
Economic and Strategic Research Group
August 14, 2020
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