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Economic Report Summary: Disappointing Retail Sales

by: Tim Iacono July 20, 2008    

Tim Iacono

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Soaring wholesale and consumer prices along with disappointing retail sales highlighted last week's economic reports. Stocks and bonds ended with the S&P 500 Index up 1.7 percent to 1,261 (for a year-to-date total return of –13.4 percent) and the yield of the 10-year U.S. Treasury note rose 15 basis points to 4.11 percent.

Retail Sales: The Commerce Department reported lower than expected retail sales for the month of June, an indication that perhaps the effects of the rebate checks may have already dissipated.

The advance estimate for retail sales rose by 0.1 percent following a downwardly revised gain of 0.8 percent in May where much of the prior month's gain was attributed to the distribution of almost $50 billion in government stimulus.

On a year-over-year basis, overall retail sales are now up just 3.2 percent, well below the "official" annual inflation rate of 5.0 percent reported on Wednesday.
Auto sales plunged 3.6 percent last month, now down 10.5 percent from a year ago, while rising prices at the pump led gasoline station sales 4.6 percent higher, now up 24.5 percent from last year at this time.

Note that all of the increase in gas station sales is due to higher fuel prices as demand has declined over this same period.

Excluding automobile sales, overall retail sales rose 0.8 percent in June, however, if just gasoline sales are excluded, overall sales dropped.

Producer Prices: Following an increase of 1.4 percent in May, prices at the wholesale level rose 1.8 percent in June, the largest monthly increase since last November. The index was driven higher by a 6.0 percent surge in energy prices, gasoline spiking 9.0 percent, and a 1.5 percent gain in food prices. On a year-over-year basis, producer prices rose 9.1 percent with energy prices accounting for most of the increase.

NY and Philly Manufacturing Indexes: Manufacturing activity in the New York and Philadelphia areas improved over the last month, but both indexes continue to indicate contraction. The Empire State Index rose from -8.7 in June to -4.9 in July with substantial improvements in new orders and shipments, both moving back into positive territory indicating expansion. The overall index for the Mid-Atlantic region improved modestly from -17.1 in June to -16.3 in July with no meaningful improvement in either new orders or shipments.

Common to both indexes were soaring prices and weakening employment. Price readings rose from 66.3 to 77.9 in the New York Index and from 69.3 to 75.6 in the Philadelphia area while employment readings fell from +1.2 to -6.3 in New York and from -6.9 to -7.3 in Philadelphia. These changes largely reflect what is happening with the rest of the economy.

Consumer Prices: Government reported inflation rose a whopping 1.1 percent in June, a level that has been reached only one other time in the last 25 years when Hurricane Katrina shut down oil refineries in the Gulf Coast, causing energy prices to spike, leading to a gain of 1.3 percent in the CPI in September of 2005.

The annual inflation rate reached the psychologically important level of 5.0 percent, its highest rate since registering 5.6 percent in January of 1991.
Monthly gains were paced by energy, up 6.6 percent in June after rising 4.4 percent in May, with gasoline costs rising 10.1 percent after a 5.7 percent gain the month before.

Food costs rose 0.7 percent in June after a 0.3 percent gain in May with the "food at home category" now up 6.1 percent from last year at this time.

Core inflation, excluding food and energy, rose more than expected, up 0.3 percent in June, and has now risen 2.4 percent on a year-over-year basis.

A "food and energy only" index (not available at the Bureau of Labor Statistics but created last week for this post using BLS data) rose from an annual rate of 10.1 percent in May to 13.3. percent in June.

This index consisted of a 5.2 percent annual increase in food, a 13.8 percent gain in household energy, and a 33.3 percent rise in the cost of motor fuel, using weightings of 59 percent for food, 18 percent for household energy, and 23 percent for motor fuel, again, per BLS data.

Housing Starts: New home construction surged in June, the number of permits rising 12 percent and housing starts increasing by 9 percent, but the entire gain can be accounted for by an upcoming change to New York building codes that saw many homebuilders rushing to file permits before the July 1st deadline.

Housing starts rose to an annualized rate of 1.066 million units, the second best total so far this year, and permits for new construction soared to 1.099 million units, the best month so far in 2008, however, the entire monthly gain can be attributed to the 103 percent increase in housing starts and the 73 percent gain in housing permits for multi-family home construction in the New York area.

Excluding this activity, housing starts fell 4 percent.

Single-family construction statistics were unaffected by the building code changes and, across all geographic regions, single-unit housing starts fell 5.3 percent to a pace of 647,000 pace, the lowest level since early-1991.

A better indication of the current condition in residential construction came in the National Association of Home Builders' Housing Market Index that fell to 16, the lowest level since record-keeping began 23 years ago. The report showed that prospective buyer traffic has fallen off substantially in recent months.

Summary: The best economic news last week was the build-up in inventory across all energy commodities that contributed to a large sell-off in energy markets that may help to relieve some of the price pressure that was all too apparent in both the wholesale and consumer price inflation readings, both of which rose to multi-decade highs.

Retail sales were disappointing, particularly in light of the amount of rebate money that was distributed in June, and regional manufacturing reports indicated little improvement from the contractionary state that has persisted for months.

The June housing starts data had a grossly misleading headline number that is likely to see a wicked reversal next month and the homebuilders' index made a new all-time low. Much more will be known on the state of the nation's housing market over the next two weeks as new data for home sales and home prices will be released.

The Week Ahead: The coming week will be highlighted by two reports on the housing market, existing home sales on Thursday and new home sales on Friday. Also scheduled for release are leading economic indicators on Monday, and reports on durable goods and consumer sentiment on Friday.

 

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This article has 5 comments:

  •  
    Jul 20 11:17 AM
    I have combined two of your charts: Retail Sales and CPI
    If you deflate(divide) RS by CPI you get ta sense of "Real" Retail Sales.
    This number has continued to drop suggesting a weak consumer despite the tax rebates.

    Reply
  •  
    Jul 20 12:57 PM
    i guess the true impact of what these reports should've had on the markets and people's evaluations of what's happening in the economy got steamrolled by the co-ordinated "let's pump up the financials so we can issue more stock while we can" efforts of...uh, free market forces? :-)

    but more to the point, your info is great, and will probably come out more and in commentator's details in the following weeks

    thanks!
    Reply
  •  
    Jul 20 03:50 PM
    Undue focus on the negative. For a "bad" economy we are doing awfully well, largely insulated by the growth of retail, consumer, and IP worldwide by companies such as GM (yes, in US trouble, but booming offshore, even in Europe), McDonalds, Walmart (23% to 37% of their profits come from nonUS in just 4 years, 2003 to 2007, headed to over 50% in another 4 years).

    Housing is one of the last rollercoaster rides. With mfg less important, and more just in time, none of the big swings anymore (whew).

    24/7 reporting makes this clear. If that had happened in 1974 or 1982 or 1990, we would have been in far more of a panic. Most people I know are doing more work, speculating less, and that can't help but be a good thing.

    For a good situation this is bad; but for a bad one it is very tame.
    Reply
  •  
    Jul 21 09:59 AM
    Just the beginning Deaverb. If it's a football game, then it's 1/2 time with the score 17-14 for the opposing team.
    Reply
  •  
    Jul 21 12:58 PM
    Actually, I would consider it almost the end of the first quarter.

    On a side note, this has been a HUGE garage sale summer in Seattle. My wife and I don't normally do them, but there were so many we thought we'd check out a few. I've spent about $500 at garage sales this spring/summer and purchased items that just don't need to be purchased "new" that are worth many thousands. It's quite amazing, actually. I figure next summer will be even better. People seem to need the cash even more than their "good" stuff.
    Reply
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