August Retail Sales and Import Prices

WHAT IT MEANS:  The missing link in this economy is strong household consumption.  It’s hard to buy more when your pay is barely keeping up with inflation.  But wage gains are slowly improving and with so many more people working, income is growing.  The added funds are being spent on just about everything.  Retail sales jumped in August, led by a surge in vehicle sales.  With the vehicle sales pace of 17.4 million units being the highest in over eight years, that was hardly a surprise.  But even when you exclude vehicles, consumers were pretty frisky.  Demand for furniture, appliances and electronics, sporting goods, home building supplies, medical products and clothing were all up.  We even went out to eat again.  The only weak links were department stores and gasoline stations.  The decline in gasoline purchases was probably due to the sharp drop in prices, not a fall off in purchases, as these data is not inflation-adjusted.  All this came on top of an upward revision to July sales.

Household spending power is not likely to be eroded very much by inflation.  Import prices dropped sharply in August as fuel costs cratered.  Excluded energy, prices rose just a little, with only vehicles showing a gain, though that was minimal.  The only real trouble spot is manufactured food import costs, which continue to surge.  As for exports, U.S. firms are also getting less for their products with the farm sector once again suffering sharp drops in its goods.

MARKETS AND FED POLICY IMPLICATIONS: The second quarter is setting up to be pretty good.  Consumers are spending again and not just on vehicles.  Right now they are being helped by the drop in gasoline costs, which is leaving a lot more money in their wallets.  Indeed, low inflation is has kept consumption from largely disappearing and with import prices essentially going nowhere, minimal inflation pressures are likely to continue.  Once we get better wage gains, spending could really surge.  The Fed generally treats energy costs as an indicator of consumer spending, not inflation and it looks like the downward trend in prices and the upward trend in household spending should continue.  Since it is all about a tightening labor market and the potential for rising wages, this report should buoy the spirits of the inflation hawks who worry that the Fed is waiting too long to start raising rates.  The FOMC meets next week and the pressure is building for the statement to drop the words “extended period” when describing how long rates will be kept low.  That would provide the flexibility to start tightening sooner than expected.  I suspect that will happen, since the public discussion about doing that has largely taken away any shock that would occur if the statement actually drops that language.  As for investors, it is the usual: Does good economic news trump rising rates?  Who know what side of that coin comes up on any given day?