July’s Consumer Spending Surge Defies Economic Expectations

• Shrinking Financial Cushions: Recent reports indicate that middle- and low-income U.S. families are facing significant financial strains due to depleted liquid resources, such as bank deposits. This situation poses a risk to future consumer spending, which is a critical component of the U.S. economy. Despite robust spending in previous years, consumer spending growth has slowed, raising concerns about the sustainability of this key economic driver​ (Kitco)​ (Restaurant News Resource).
• Labor Market and Wage Growth: The U.S. labor market, which has been a primary driver of consumer spending, is starting to show signs of cooling. Job growth has decelerated, and wage increases have slowed compared to the robust gains seen during the pandemic. These trends suggest that while consumers may continue spending, they are likely to do so at a more restrained pace moving forward​ (Restaurant News Resource).
• Impact on Travel and Oil Demand: The slowdown in consumer spending is also affecting global markets, particularly in sectors like air travel. Reduced disposable income is leading to weaker demand for travel, which in turn is contributing to a decline in global jet fuel consumption. This slowdown is expected to weigh on oil prices in the coming months​ (Kitco).

July’s consumer spending numbers hit the economic scene like a lightning bolt, shaking up expectations and sending analysts into a frenzy to make sense of the chaos. The Commerce Department’s latest data revealed that retail sales surged by a surprising 1% in July, a number adjusted for seasonality but not for inflation. Economists, who had been cautiously expecting a mere 0.3% increase, were left scrambling to update their forecasts. To add to the whirlwind, June’s figures were quietly revised downward, showing a 0.2% decline, a stark contrast to what had been initially reported as a flat month.

And just when it seemed the surprises were over, the numbers kept delivering. Even when you strip away the unpredictable auto sector, sales still climbed by 0.4%, blowing past the modest 0.1% increase that had been expected. This burst of consumer spending has thrown a wrench in the narrative that the American shopper is down for the count.

Ask and you shall receive, @jeffreyatucker:
Jul advance retail sales estimate is 14.0% above Apr ’21, but down 3.0% in real terms over that same time – businesses are selling less stuff, but at much higher prices: pic.twitter.com/b5HQuP5cOy

— E.J. Antoni, Ph.D. (@RealEJAntoni) August 15, 2024

On the job front, the good news didn’t let up. Initial claims for unemployment benefits dropped to 227,000 for the week ending August 10, a 7,000 decrease from the previous week and well below the 235,000 that had been forecasted. It’s a signal, perhaps, that despite all the economic headwinds, the labor market isn’t just holding steady—it’s standing tall.

The retail sector was driven by standout performances in motor vehicle and parts dealers, which saw a 3.6% jump, electronics and appliance stores with a 1.6% increase, and food and beverage outlets, which ticked up by 0.9%. But it wasn’t all smooth sailing—miscellaneous retailers took a nosedive, plunging 2.5%, while gas stations and clothing stores saw slight declines of 0.1% each.

The markets, ever reactive, surged in response. Stock futures shot up, and Treasury yields spiked as investors soaked in the unexpectedly strong data.

We get the US July advance retail sales data. Consensus is a healthy 0.4% increase vs our 0.8% call. We think there is upside risk to the consensus forecast via online sales as consumers responded to aggressive sales & discounting. American households like a good sale & have the… pic.twitter.com/HBunuFxKUg

— Joseph Brusuelas (@joebrusuelas) August 15, 2024

“This report is a fresh reminder that the U.S. consumer has an uncanny ability to defy expectations,” wrote Richard de Chazal, a macro analyst at William Blair. He pointed out that these figures starkly contradict the doom-and-gloom scenarios of a consumer base on the brink of collapse.

Adding another layer to the economic puzzle, inflation data released the same week showed a slight easing. Consumer prices inched up by a modest 0.2% in July, pulling the annual inflation rate down to 2.9%, its lowest point since March 2021. Wholesale prices followed suit, rising by just 0.1% for the month and 2.2% year-over-year.

Yet, even as inflation cools, the numbers remain stubbornly above the Federal Reserve’s 2% target. And just when things seemed to be calming down, the Labor Department threw a curveball with its report on import prices, which ticked up 0.1% in July, slightly exceeding expectations. On a year-over-year basis, import prices rose by 1.6%, the largest increase since December 2022.

As the economic landscape continues to mystify, financial markets are buzzing with speculation that the Fed might finally break its four-year streak and cut rates in September. But the surprising resilience in consumer spending could give policymakers pause, urging them to tread carefully rather than rushing into rate cuts.

🇺🇸US RETAIL SALES SURGE IN JULY EASING SLOWDOWN FEARS

U.S retail sales rose 1% in July outpacing expectations
Unexpected strength in consumer spending may lead markets to reconsider likelihood of a steep interest rate cut with quarter-point reduction now appearing more likely pic.twitter.com/v3SQeGbika

— Faraz Saeed 🇵🇰 (@farazsaeed15) August 15, 2024

Even retail giant Walmart couldn’t stay out of the fray, reporting strong earnings and sales for the last quarter and raising its outlook for the year. However, they weren’t without their own warnings, hinting at potential challenges in the latter half of 2024.

Investors, who had been laser-focused on inflation, are now casting a wider net, concerned about potential cracks in the labor market and beyond. Though the July payrolls report was weaker than expected, continuing claims for unemployment benefits dipped slightly to 1.864 million, suggesting some underlying stability.

But the broader economic landscape remains anything but serene. Manufacturing data painted a mixed picture, with the New York Fed’s Empire State Manufacturing Index inching up but still mired in negative territory at -4.7, only marginally better than the -6 forecast. Meanwhile, the Philadelphia Fed’s manufacturing index plunged into the red at -7, a far cry from the anticipated 7.9.

And in another twist, the Federal Reserve reported that industrial production slumped by 0.6% in July, a steeper drop than expected, partly blamed on the disruptions caused by Hurricane Beryl. Capacity utilization also dipped to 77.8%, below the forecasted 78.5%, indicating that the industrial sector might be facing more challenges than previously thought.

Major Points

• Retail sales surged by 1% in July, far exceeding predictions.
• Excluding autos, sales still rose by 0.4%, outpacing forecasts.
• Unemployment claims fell to 227,000, signaling labor market strength.
• Inflation eased slightly, but still remains above the Fed’s 2% target.
• Mixed signals from manufacturing and industrial production add uncertainty.

James Kravitz – Reprinted with permission of Whatfinger News