KEY DATA: Sales: -1.1%; Ex-Vehicles: -0.4%/ IP: +0.9%; Manufacturing: +1.4%/ NAHB: -5 points
IN A NUTSHELL: “Despite household uncertainty affecting demand, the manufacturing sector remains strong.”
WHAT IT MEANS: Households have been shopping ‘till they dropped, but it looks like they dropped shopping in July. Retails sales declined sharply, led by a major pullback in vehicle purchases. Since we knew that vehicle demand was down significantly, the fall in overall sales was not a surprise. What was disconcerting was the broad-based nature of the cutbacks. People ate out a lot and bought electronics and appliances, but that was it. There was a major increase in gasoline purchases, but there was also a major increase in gasoline prices, so we can discount that rise. Otherwise, sales at most other types of stores, including the Internet, declined. Consumers may be cautious with their money, but you could not tell that from the Fed’s industrial production numbers. Manufacturing output was up in almost every segment. Only the petroleum and apparel sectors were down. While it was nice to see a burst of new production, manufacturing has been up and then down every other month. The saw-tooth trend is up, but extremely uneven.
The housing bubble seems to be deflating. The National Association of Home Builders’ index plummeted in August, led by a declines in both current sales and traffic. I don’t know how many times I have said that “the next time a housing bubble slowly deflates will be the first time a housing bubble slowly deflates”, so I am a little cautious about what comes next. Clearly, the panic buying and huge price increases we saw over the past year had to come to an end – and it is doing just that. It’s unclear, though, how big a slide will follow. If there is a sign of hope, it was in the expectations component of the index. It was flat. Let’s hope the confidence that the developers are showing in the future turns out to be correct.
IMPLICATIONS: Is the economy slowing? Yes. Is that a surprise? No. Is there cause for concern? Not yet. The big problem facing the economy, once again, is the virus. It is knocking the sox off consumer confidence, as seen by the huge decline in the early August University of Michigan Consumer Sentiment index. Those that hoped the virus would disappear have been greatly disappointed. And with schools reopening, the Delta virus affecting younger adults and children and the politics of dealing with the virus getting even worse, if that is possible, uncertainty is setting in. The Census Bureau has developed an experimental state monthly retail sales report, which will be released in ten days, and it will be interesting to see if the impacts differ by cases of virus. Just a few states account for a large majority of new cases and looking at those states vs. those where the virus is not as viral might provide some insight into how important the continued pandemic is on consumer decision making. But there is also good news, as industrial production remains strong. The issue isn’t the level of demand, as that remains high. It’s just that the huge increases in sales were not sustainable and we have to get used to more normal patterns. Overall, all, though, the risks going forward are to the downside. The supplemental unemployment payments have only a few more months to go and with the government’s business support waning as well, we could see a slowdown in retail sales and a rise in business bankruptcies. We are entering the transition phase, from massive government support to ultimate dependence on the private sector. Biden’s eventual budget will not likely have a major impact for a few more months, so look for some additional large swings in the economic data. Interestingly, those negative numbers could arrive just as the Fed is contemplating announcing its intention to reduce its asset purchases. As is the case with most things in life, timing is critical and the Fed may be doing the correct thing, but not necessarily timing it well.