KEY DATA: Sales: +0.5%; Excluding Vehicles: +0.6%/ IP: +0.1%; Manufacturing: +0.3%/ Productivity: +2.9%; Labor Costs: -0.9%/ NAHB: -1 point

IN A NUTSHELL: “The solid manufacturing sector and continued consumer spending hold out hope that third quarter growth will be good, though maybe not great.”

WHAT IT MEANS: Factors that drive and restrain growth are creating major uncertainties about the economy and even the data are unclear. Consider retail sales, which rose solidly in July. But that came after a sharp downward revision to the June numbers. That raises the possibility second quarter growth could be revised downward as well. The biggest increases were for food, both at home and at restaurants, gasoline and in department stores. Prices are rising in most of those categories. As for department stores, are sales really surging? There were strong online sales, which was not surprising given Amazon’s increase at its Prime Day sale. This was a good report, but it isn’t adjusted for inflation, so it is not clear just how fast consumer spending is growing, especially since vehicle sales were down in July.

One area which continues to do well is manufacturing. Output rose moderately in July after a robust production spurt in June. Rising vehicle assembly rates helped, but given the fall off in demand, that may turn around quickly. Still, most manufacturing sectors posted production gains, so this sector remains solid. Slowdowns in the mining and utility sectors reduced overall output gains.

With growth booming in the second quarter, it should not have been a surprise that productivity jumped by the fastest pace in over three years. Manufacturing productivity gains remain somewhat sluggish. While production surged, hourly compensation lagged well behind and that led to a sharp decline in labor costs. At least in part, the strong profit gains reflected those cost controls. Unless more of those profits find their way into compensation, the solid retail sales numbers may not be sustainable.

Homebuilders are not a happy bunch these days. Interest rates and input costs are rising while demand is moderating. Thus, the decline in the National Home Builders Associations index was expected. The level is the lowest in a year and is a warning that this component of the economy may continue to restrain growth.

MARKETS AND FED POLICY IMPLICATIONS: The problems in Turkey are the focus of attention right now and rightfully so. We just don’t know how long the crisis will go and what kind of contagion effect will be created. This uncertainty is causing some rush to safety. Meanwhile, back in the United States, the economy may be moderating, but not faltering. Still, the president’s economists at the Office of Management and Budget just downgraded growth for this year and Congress’s economists at the Congressional Budget Office recently projected a sharp moderation in growth next year and a further slowdown in 2020. The CBO’s forecast is very much in line with most private sector forecasts. At the same time, most inflation forecasts are for the rate to exceed the Fed’s target of 2% for a number of years, though not significantly. But it takes the slowing growth to keep inflation from getting even hotter. The Fed continues to face an economy that has strong growth, rising prices but economic uncertainties, especially when the trade situation is factored in. Unless Turkey unexpectedly creates major economic and financial problems, there will be time to slow rate hikes down next year, so two more rate hikes remain the likely course of action.