KEY DATA: Sales: +0.5%; Ex-Vehicles: +0.5%/ IP: +0.4%; Manufacturing +0.2%
IN A NUTSHELL: “Consumers are consuming, even if manufacturers are not manufacturing.”
WHAT IT MEANS: Consumer spending meet Samuel Clemens: The reports of their demise were both greatly exaggerated. But don’t blame economists, please. The April retail sales numbers, which initially came in as down, were revised to show a decent rise instead. The government got the magnitude right but the sign wrong. Duh. And in any event, economists expected and got a sharp improvement in May. We thought households were spending decently and that is exactly what is going on. In May, demand rose in almost every major category, including vehicles, sporting goods, restaurants, electronics and appliances, general merchandise, health care and on the Internet. Food and beverage stores were down modestly, while the shrinking department store component, not surprisingly, posted a large decline. Those sales are being picked up elsewhere, which is why all those stores are closing. Finally, there is a so-called “core” retail sales number that best approximates the consumption number in the GDP report. It excludes vehicles, gasoline, building supplies and food services and was up strongly in May and (after revision) moderately in April. In other words, households are still shopping.
As for the weakest link, industrial production rose in May as manufacturing posted its first gain of the year. But let’s face it, a modest rise after large declines in January, February and April (March was flat) doesn’t tell me that the industrial heartland is doing fine. Manufacturing production is up less 1% over the year, which really says it all. Indeed, what saved the sector were rebounds in the output of vehicles, plastics and electrical equipment, which had been faltering much of this year. I am not sure that those increases represent a reversal of fortune or just a temporary uptick. Overall industrial production was helped by a jump in utility output, but it is not clear if that was due to improved industry demand or weather conditions. MARKETS AND FED POLICY IMPLICATIONS:When the markets find a sucker they move mercilessly and it appears that Jay Powell is that target right now. Amazingly, there are a fair number of analysts that think we could get a rate cut at next week’s FOMC meeting. Really? Meanwhile, the July meeting is considered a lay up. I just don’t believe it.Granted, the economy is not booming, but it is also not faltering and today’s data make that clear. Yes, the Fed Chair has shown that if the markets huff and puff enough they can blow down the will of the Fed. They did that in December and that has given investors the confidence that they can pressure the Fed to provide the drug of choice, liquidity, whenever the going gets tough. If we do get a rate cut, the markets will likely rally, despite the reality that a 25 basis point reduction will do absolutely nothing to the economy. But hey, there is so much out there these days that bears no resemblance to reality that adding the Fed to the list would not surprise me. I grew up watching Rod Serling’s “The Twilight Zone” and now we seem to be living it.