Behind the data: Better than expected
- Retailers caught a mid-summer tailwind from consumer spending in July, providing another solid piece of data indicating that the economy remains on an expansionary path.
- Headline retail sales increased by a higher-than-expected 1.0% last month compared to expectations for a 0.4% advance.
- That’s a very strong result by virtually any measure, but particularly compared to the largely measured advance of 2.7% over the past year.
- Underpinning that gain was an exceptionally strong month for auto sales, but the control group increase of 0.3% still bodes well for consumption and overall GDP growth in Q3.
- Auto sales may have led the way, but the underlying positive tone of the report extended across most sectors, ranging from electronics and furniture to groceries and general merchandise.
Consumer health: A mixed bag
- Broadly speaking, consumer balance sheets and household financial positions remain on a solid footing.
- The relative strength of the labor market, while showing clear signs of deterioration this year, remains a positive factor underpinning consumer spending as wage growth has slowed, but remains solid.
- Conversely, the sharp rise in credit card debt in recent years is a cautionary note, particularly for borrowers that have seen their balances outstanding climb while interest costs have risen sharply.
- Inflation has been a source of frustration for all consumers, but particularly for lower-income households which devote a much larger portion of their monthly spending to food and shelter, both of which experienced significant price increases since 2021. Many households that felt that pinch undoubtedly turned to credit as a way to make ends meet.
- More recently, signs of a slowing economy and more pedestrian wage gains has led more consumers to be more budget-conscious in their spending habits. That may not translate to meaningfully trimming their overall outlays, but consumers are being much more judicious and cost conscious in how they are spending those dollars.
Soft or hard landing?
- Coming just a few weeks after the disappointing July jobs report sent shivers through the market and resurfaced concerns about the potential for a near-term hard landing, today’s retail report provides some reassurance that the economy still appears to be on a solidly expansionary track.
- Another positive real-time indicator for the economy came from first-time jobless claims, which edged back to 227,000 last week. Claims may be up notably from their cyclical lows but remain in a constructive range, with layoffs still not signaling a broad deterioration.
- Most data are pointing to a continued easing in inflation pressures in the months ahead, and the Federal Reserve (Fed) now appears very well positioned to turn its sights to the slowdown in job creation and loosening in labor conditions as the greater near-term risk. Whether policymakers conclude on a quarter- or half-point cut in September remains to be seen, but the relative strength of much of the recent data would suggest that a more measured quarter-point reduction in the Fed funds rate is more likely. The August jobs report will be important in that decision-making process though. Another weak report would raise the stakes considerably for policymakers and increase the likelihood that a more aggressive first step toward easier policy could be preferred.
The bottom line?
- The economy has come off the post-lockdown, stimulus fueled boil of a few years ago. That was both to be expected and necessary to cool inflation and rebalance the gap between labor demand and supply.
- Still, there’s a meaningful difference between an economy that’s cooling and one that’s crashing. With the Fed now seemingly well positioned to pivot toward rate cuts in the near term, the question will be whether policymakers can stick the landing.
A recession over the coming months can’t be ruled out, but for now, the data seems to keep the potential for a soft landing in play.
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