It’s Friday and that means it’s time to review the latest economic data and identify which pockets of the economy are heating up and which are slowing down. Don’t worry about catching every headline and every report throughout the week—I recap all of the most important news impacting your wealth right here every Friday. Let’s take a look at this week’s big headlines:
#1—Summer Heat Wave Keeps Consumers At Home
In June, retail sales advanced 0.4%. These results were largely due to strong vehicle sales (up 1.8%) and higher gasoline prices (up 0.7%). Excluding vehicle and gasoline sales, overall retail sales in June declined 0.1%. There were some surprising details in the retail sales numbers, such as a sharp 2.2% decline at home improvement stores, a 1.2% decline at bars and restaurants, plus a 1% decline in department store sales. Overall, this was a disappointing report, since economists were expecting a 0.9% surge in overall retail sales. Over the past 12 months, retail sales have risen 5.7%. The silver lining from the June data is that some retail sector are clearly deteriorating, giving the Fed another reason to keep the money pump on.
#2—Business Stockpiles Are Up, But Not By Enough
In May, business inventories climbed 0.1%. This was slightly stronger than economists expected—the consensus was that stockpiles would remain unchanged. A 1.1% increase in business sales prompted businesses to restock in May. Meanwhile, business inventories rose a revised 0.2% in April, down from the previous estimate of a 0.3% gain. Since both a bigger trade deficit and decelerating inventories dramatically impact Gross Domestic Product (GDP) growth, many economists’ estimates for second quarter GDP growth are now approaching only 1.5%. This is down from the first quarter’s annual pace of 1.8%.
#3—Get Ready For Higher Prices
In June, the Consumer Price Index (CPI) rose 0.5%, due largely to a 6.3% increase in gasoline prices, as well as higher costs for clothing, food, housing and medical care. Economists had forecast that the CPI would rise just 0.3%. The core CPI, excluding food and energy, rose 0.2% in June, in line with expectations. In the past 12 months, the CPI has risen 1.8%, up from May’s 1.4% annual pace. So inflation is clearly starting to brew (this is supported by last week’s PPI report), which helps justify higher the bond yields we’ve seen in the past few months.
#4—Industrial Production: A Blast Of Cool Air For the Economy
In June, industrial production rose 0.3%, led by a 2.2% rise in home electronics and a 1.4% gain in automotive products. This slightly underperformed expectations—economists had predicted a 0.5% rise in industrial production. After May’s flat reading and April’s revised 0.3% decline, the increase in industrial production in June was a pleasant surprise. Looking forward, July’s industrial production should be also high due. The heat wave covering much of the Northeast and Midwest has led to record air conditioning demand; this boosts utility output and causes natural gas prices to rise due to all of the "peaking power plants" that run on natural gas.
#5—Rising Rates Trip Up Housing Recovery
In June, housing starts declined 9.9% from May from a seasonally adjusted rate of 836,000. This was below the consensus estimate, which called for a 925,000 annual pace. However, May housing starts were revised up 14,000 to a 928,000 rate.
At the same time, building permits also declined by 7.5% in June compared to May, which was the sharpest monthly decline in more than two years. While June’s results also underperformed expectations, May permits were revised up 11,000 to a 985,000 rate.
It is becoming increasingly clear that rising long-term interest rates may be making builders more cautious. Since housing has a big impact on GDP growth, June’s slowdown provided economists with another reason to revise their second-quarter GDP forecast downward.
#6—Layoff Activity Gets Back On Track
Last week, jobless claims dropped 6.7% to an annual rate of 334,000. This was a solid beat to analyst expectations of 344,000 initial claims. Meanwhile, the four-week moving average declined 1.5% to 346,000. This week’s decline essentially negates the previous week’s 1.6% increase, and the four-week moving average still remains comfortably below 400,000. Typically, the U.S. economy creates payroll jobs when initial claims fall under 400,000, so we remain in decent shape as long as we remain below that benchmark.
#7—The LEI Index Doesn’t Paint a Pretty Picture For the Second-Quarter
In June, the Leading Economic Indicators (LEI) index was unchanged—below economists’ consensus estimate of a 0.3% increase. Ken Goldstein, a Conference Board economist, said "The biggest uncertainties remain the pace of business spending, the improvements in consumer spending power and the impact of slower global growth on U.S. exports." Due to the anemic June LEI, I expect that more economists will now slash their second-quarter GDP forecasts.
Have a nice weekend,