July Retail Sales, Industrial Production and 2nd Quarter Productivity

KEY DATA: Sales: +1.2%; Ex-Vehicles: +1.9%/ IP: +3%; Manufacturing: +3.4%/ Productivity: +7.3%; Labor Costs: +12.2%

IN A NUTSHELL: “Retail sales gains are moderating and without the massive influx of government welfare payments, it is likely they will continue to flatten.”

WHAT IT MEANS:  The economic data continue to behave like SuperBalls, bouncing around like crazy.  After huge gains in May and June, retail sales settled back to a somewhat more normal level in July.  Sales were less than expected, but the June report was upgraded, so the two months together were close to projections.  Despite a sizeable rise in units sold, the dollar value of vehicle purchases were down. (I assume that was due to a larger percentage of lower-priced vehicles being purchased.)  The change in what we buy was seen in outsized changes in a number of components, especially electronics and appliance stores, which posted a nearly 23% increase.  Work at home is shifting business investment in working environments to household spending on all sorts of things.  As an aside, Amazon Days didn’t happen this year.  The bump normally gotten in July from Amazon’s huge numbers was not in the data.  However, online purchases were still up, implying the Amazon Days effect may not be as important as many believe.  Instead we seem to now have Always Amazon Days

Industrial production jumped again in July as the manufacturing sector continues to recover. Manufacturing activity is up over fifteen percent since the April bottom, but it is still down eight percent from the February level.  Since last July, manufacturing output is off nearly eight percent andyou have to go back to September 2011 to see a level of production this low.The one bright spot was consumer goods output, which is back to where it was in spring 2017.  

Productivity skyrocketed in the second quarter, as firms cut hours worked even faster than they reduced production.  That is hardly anything positive, as the declines which were -38.9% for output and -43% for hours worked, which reflect the massive collapse of the economy.  With companies unable to cut wages (they were actually up sharply), labor costs skyrocketed.  These huge changes are fascinating, but hopefully we will not see them again for a very long time.  But they are not reflective of anything normal, so use them as a measure of the downturn, not a trend in fundamental economic factors.   

IMPLICATIONS: Consumers were happy to get out in the world once the economy started to reopen and they have done that.  The July level of retail sales points to a massive rise in third quarter consumption, assuming households can keep it up.  But our “friends” in Washington seem to be doing everything possible to kill the recovery.  As I have said numerous times and will keep saying until something changes, it has been the governments household and business welfare programs that have supported household and business spending.  With the Senate on vacation (clearly, there isn’t any important work to be done so why not get out of town?), the funds flowing to unemployed workers and supporting businesses are disappearing. The president’s executive orders are not likely to add much to income and the PPP money is being used up.  So, where are the funds to keep retail sales rising going to come from?  Got me. We could begin to see that in the August spending data and if nothing gets done in September, don’t be surprised if there is a weakening not only in consumer demand but in hiring as well.But hey, investors have pixie dust and “I believe” on their side, so don’t fret too much for the markets.  And if something happens, there is always the Fed to step in and insure that our “ free-markets” work well.  By that I mean not go down too much.  Isn’t capitalism great?