Retail Sales and Single-Family Starts Point to a Resilient Economic Growth

Key Takeaways:

• Retail sales and food services rose 0.7 percent in July and were revised upward in June, according to the Census Bureau. Non-store retail sales, representing primarily online stores, jumped 1.9 percent and have risen by more than one percentage point for each of the past four months. Restaurant and bar sales were also strong, rising 1.4 percent hinting at strong services spending. On the weaker side, interest rate sensitive sectors such as sales at motor vehicle and parts dealers declined 0.3 percent (though this was potentially price related) and sales at furniture, electronics, and appliance stores were down 1.6 percent. Control group retail sales, which exclude food services, autos, building supplies, and gas stations, increased 1.0 percent, their strongest monthly gain since January.
• Industrial production, a gauge of output in the manufacturing, utility, and mining sectors, rose 1.0 percent to 102.9 in July following a downward revision to June’s output figures, according to the Federal Reserve Board. Part of the strength was due to a weather-related 5.4 percent jump in utilities output. Manufacturing output rose 0.5 percent to 99.5 on the strength of a 5.2 percent gain in motor vehicle and parts manufacturing. Mining output increased 0.5 percent to 117.9.
• The Conference Board Leading Economic Index (LEI) declined 0.4 percent in July and is down 4.0 percent over the past six months. The ISM Indices and consumer expectations of business conditions are the two largest drags on the overall index.
• The minutes from the Federal Open Market Committee (FOMC) July 25-26 meeting showed that while “most” participants favored a 25-basis-point hike in their July meeting, some officials noted that the risks of raising rates too high versus not high enough “had become more two-sided.” Still, the minutes stated that most participants continued to see upside risks to inflation and that future rate decisions would depend on the incoming data.
• Housing starts increased 3.9 percent to a seasonally adjusted annualized rate (SAAR) of 1.45 million units in July, according to the Census Bureau. The gain came entirely from single-family starts, which rose 6.7 percent to a SAAR of 983,000. Multifamily starts declined 1.7 percent to a SAAR of 469,000 after a 16.5 percent pullback in June. Single-family permits edged up 0.6 percent to a SAAR of 930,000 while multifamily permits declined 1.0 percent to a SAAR of 512,000.
• The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index declined 6 points to 50 in August, ending a seven-month streak of improving homebuilder optimism. The index for single-family sales in the present declined 5 points to 57 while the index for single-family sales in the next six months was down 4 points to 55. The index for foot traffic of prospective buyers dropped 6 points to 34.

Forecast Impact:

Control group retail sales, which directly flow into the calculation of Gross Domestic Product (GDP), solidly beat expectations in July, adding to existing evidence that economic growth appears to have strengthened in recent months. Combined with the upward revision to June retail sales, which indicates a stronger base entering the third quarter, consumption growth is on track to beat our current near-term forecast. Industrial production also had a somewhat unexpectedly strong month, though much of this was due to warm weather causing utilities output to jump. Of particular importance in terms of a cyclical indicator, manufacturing activity rose modestly and has maintained roughly the same level of output since January. This indicates that although manufacturing output is largely stagnant, it hasn’t rolled over into recessionary territory. The LEI, on the other hand, remains solidly in recessionary territory despite improvements in recent hard data measures (the LEI uses a mix of soft and hard data but is currently being pulled down primarily by survey data). All told, we continue to believe there are multiple headwinds to the economy that will slow growth in the future, though near-term risks to our forecast are to the upside.

New home construction was in line with our expectations. We believe the convergence of single-family starts, permits, and completions represents a normalization in residential construction conditions as backlogs clear and demand remains sufficient given the strong labor market and lack of existing homes available for sale. Still, we note a likely August decline in single-family starts as homebuilder sentiment pulled back amid a resurgence in mortgage rates back towards 7 percent. Additionally, we continue to expect softening towards the end of the year as we forecast a general slowing in economic growth.

Nathaniel Drake
Economic and Strategic Research Group
August 18, 2023

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