KEY DATA: Retail Sales: +0.2%; Excluding Vehicles: +0.4%/Import Prices: +0.1%; Excluding Fuel: -0.1%

IN A NUTSHELL:  “Consumer exuberance remains restrained and that raises questions about how strong the economy can or will grow.”

WHAT IT MEANS: The winter or our consumer discontent continued into the spring of our shopping boredom.  Most economists assumed that the weather drove down spending in the first part of the year but that would change dramatically as we got to the summer.  Well, spending is up but not nearly as robustly as forecast.  Retail Sales increased less than expected in June.  Strangely, vehicle sales fell.  I say strangely because unit sales hit their highest level in eight years in June.  After going crazy at the Home Depots of the world in April and May, demand for building supplies collapsed in June.   And since we weren’t shopping like crazy, we didn’t eat out a whole lot either.  But there were positive signs in the data.  Sales of food, clothing, sporting goods, health care products and appliances and electronics were up.  We shopped online and at general merchandise stores, so we really did spend some money.  These are the products that show up in the consumption component of GDP so we could see a decent spending number when the second quarter growth rate comes out on July 30^th, the same day the next FOMC meeting ends.

Consumers can continue to buy lots of things, even with limited incomes, since inflation is well restrained.  We saw that again with the import price numbers.  The cost of foreign products rose minimally in June but most of the gains came from a jump in energy costs.  Food prices fell while the costs of consumer goods, capital equipment and vehicles were flat.  In other words, consumer purchasing power, at least when it comes to most imported products, is holding up.  On the export side, a similar pattern was observed as prices fell pretty much across the board.

MARKETS AND FED POLICY IMPLICATIONS: I keep saying we cannot get strong growth until we get strong income growth and so far we don’t have either.  Part of the problem with the expected rebound in spending is that some of the demand was lost forever.  If we didn’t go out to eat in February, we were not going to make up for that in June.  But another, longer-term change may be in the wind: The long-lasting, slow recovery may be eroding the “shop ‘till you drop” mentality.  People may be discovering they really can live without all the things they used to think were necessary.  Doing without for a short time may cause only temporary reductions in demand but cutting back for an extended period could change habits.  We will see what happens when income growth gets back toward decent levels, but we have to consider that the Great Recession and the Not-So-Great Recovery have modified spending patterns. With the Fed worried about disappointing growth, the decline in non-fuel import prices provides further cover to keep rates low for an even longer period of time.  Inflation is hardly a threat right now.  As for the markets, the focus of attention is where it should be, on earnings.