June Retail Sales, Import and Export Prices and Small Business Optimism

KEY DATA: Sales: -0.3%; Excluding Vehicles: -0.1%/ Import Prices: -0.1%; Nonfuel: -0.2%; Export Prices: -0.2%; Farm: -1.5%/ NFIB: -4.2 points

IN A NUTSHELL: “With consumers not buying, inflation decelerating and small businesses worried, the greatly expected second half boom may turn out to be a little less robust.”

WHAT IT MEANS: While not all economic indicators were showing a rapid recovery, there were many signs that the economy was really picking up some speed. Well, it might be time to sit back and rethink this a bit. May retail sales were robust and while June vehicle demand was strong, it was below the huge May sales pace. So most economists, including myself, expected consumer spending to grow minimally in June. Well, it didn’t. Instead, demand declined, even when vehicles were excluded. Sales at electronics, appliances and general merchandise stores were pretty solid, but demand for furniture, clothing, building materials was off, we didn’t buy anything online and we didn’t go out to eat. Weird. Worse, gasoline purchases rose and that was likely due to a rise in prices. In other words, this was not a very good report.

The gap between the Fed’s inflation target and the inflation rate has been widening slowly and today’s import price report indicates that trend could continue. Import prices fell in spite of an increase in energy costs. Food costs dropped sharply, while consumer and capital goods as well as vehicle prices were flat. Only energy related products showed a rise. On the export side, prices fell as well and the long-suffering agricultural sector continued to see its prices drop.

As for small businesses, confidence took a major hit last month. It had risen back to normal levels in May, but it seems June was a bummer, reflecting the lack of consumer spending we saw in the retail sales report. Firms didn’t hire anybody and kept wages stable.

MARKETS AND FED POLICY IMPLICATIONS: Today’s reports were disturbing as they point to an economy that may not be picking up as much steam as seemed to be the case. Why the downturn in consumption occurred is baffling. Plenty of jobs are being created and confidence picked up, so why households stayed home is unclear. With the FOMC meeting in two weeks, reports that show modest consumer spending and moderating inflation play into the hands of those who want to push off hiking rates. No one expects the Fed to do anything at the July meeting, but there was the possibility that the Committee would signal that the economy was strong enough to absorb increases in rates. That may not occur. Even if it doesn’t, a September rate hike cannot be ruled out as we get two more jobs report before then, but they will have to be strong. As for the markets, who knows what will drive activity today. The weak reports would normally be taken as a positive for stocks as they could delay the inevitable. There is also the Iran agreement and that would point toward lower energy costs. Regardless, we need the consumer to get back into the game and soon.