Retail Sales Decline as Spending Shifts U.S. shoppers have reduced purchases of big-ticket items popular during the pandemic and are spending more on dining out as businesses reopen. Retail sales fell 1.3% in May but were up 28% from a year earlier.
Never mind the 28% YoY, it’s the base effect. But mind the +23% growth over May 2019, no base effect there. Excluding Food Services and Drinking Places, +26% over the last 2 years. This chart plots both series indexed at February 2020 = 100. Sales have declined in each of the last 2 months but from such a high level, a slowdown is simply normal.
Retail sales keep rising much faster than aggregate payrolls, suggesting continued dissaving.
Car sales have been quite weak in May (-3.7% MoM), largely due to restricted inventory.
Also, building materials sales fell 5.9%, the third sharp decline in the last four months. Sticker price shock. Here’s Control Retail Sales (excludes cars, gas, building materials/garden equip and food services): +21% over May 2019.
The Chase Consumer Card Spending Tracker was showing little signs of weakening as of June 11, still up 13.3% over 2 years ago.
and now, Travel and Entertainment spending is recovering:
Consumer finances remain in great shape with incomes showing increasing signs of picking up and credit card baorrowing having been paid down. Meanwhile, last week’s Federal Reserve flow of funds data showed households have seen their wealth surge $20tn since the end of 2019 with $3tn of that increase in liquid cash, checking and time savings deposits. That is a huge amount of financial ammunition that could support strong consumer spending over the next few years let alone the next few months. (ING)
U.S. Producer Prices Rise Further in May
The Producer Price Index for final demand increased 0.8% m/m (6.6% y/y) in May following a 0.6% m/m gain in April. The annual increase is the largest in the series history dating back to November 2009. The index has risen at a 9.9% annual rate over the past three months. A 0.5% rise had been expected by the Action Economics Forecast Survey. Nearly 60% of the May increase in the index for final demand can be traced to a 1.5% m/m rise in prices for final demand goods. The index for final demand services moved up 0.6% m/m in May.
The PPI excluding food and energy prices gained 0.7% m/m (4.8% y/y) in May for a third consecutive month. A 0.5% rise had been expected. The PPI less prices of food, energy and trade services rose 0.7% m/m (5.3% y/y), the same monthly increase as in April.
Prices for final demand goods advanced 1.5% m/m (11.1% y/y) in May after rising 0.6% in April. Over 40% of the broad-based increase in May can be traced to the index for final demand goods less foods and energy, which moved up 1.1% m/m. Prices for final demand foods rose 2.6% m/m in May, their largest monthly gain since May 2020. Prices for final demand energy rebounded 2.2% m/m after having fallen 2.4% m/m in April. Final demand energy prices have risen 47% in the past year and at a 52% annual rate over the past six months.
Final demand goods prices excluding food and energy increased 1.1% m/m (5.9% y/y) in May versus a 1.0% m/m gain in April. Core finished goods prices advanced 0.6% m/m (2.9% y/y), the same monthly gain as in April. Prices of private capital equipment rose 0.8% m/m (2.7% y/y) in May after a 0.6% m/m gain in April. Prices of core government purchases increased 0.8% m/m (4.8% y/y) in May, the same as in April.
Final demand services prices increased 0.6% m/m (4.5% y/y) in May, the same monthly gain as in April. Trade services prices rose 0.7% m/m (3.6% y/y), accounting for about 40% of the May increase. Prices for final demand services less trade, transportation, and warehousing rose 0.2% m/m while prices for final demand transportation and warehousing services jumped 1.9% m/m.
Transitory to what?
Moreover, the manufacturing sector is experiencing growing corporate pricing power. The ISM reported order books continue to grow strongly, but production is struggling to keep pace. This means the backlog of orders has risen to new all-time highs while at the same time customer inventories are at record lows. This suggests pipeline price pressures will continue to build, which is another reason for us to believe consumer price inflation could stay higher for longer. (ING)
Pundits will parse today’s FOMC statement and Powell’s presser. John Authers prepares us:
As for the Fed, even if it talks more about inflation than the ECB, it still doesn’t talk about it much. The FOMC seemed more worried about it at the top of the brief boom created by the Trump tax cuts, when it embarked on a policy of quantitative tightening, or steadily reducing the number of assets on its balance sheet. That concern almost vanished during the pandemic, and remains low, as Oxford Economics shows:
The implication is that FOMC members really are prepared to look through rising inflation for a while longer. And if all this work analyzing word choices seems a little excessive, Oxford Economics’ Fed Sentiment indicator, produced via machine learning analysis of Fed transcripts, does seem of interest. When the Fed’s governors appear particularly agitated, the chart shows, yields tend to drop, and the relationship has grown a lot closer in the years since the global financial crisis:
In principle, it’s not surprising that the bond market has cleaved more closely to Fed sentiment in the last decade, as the outlook for continuing support has grown ever more important in these weird conditions. And if we return to the puzzle of why bond yields stay so low, it may well be because investors are doing a good job of gauging the central bank’s thinking. So as we all brace for FOMC Day, the bottom line is that we shouldn’t expect any great change of course; but that the intense efforts to parse every word may actually be justified.
Mohamed A. El Erian expects little new wording:
(…) If they were market traders or CEOs of competitive private companies, the answer would be clear: Start reducing exposure to a now more risky posture by moving forward with a partial pivot in light of the changed circumstances, thereby keeping their options open and better balancing risk. That is not what is likely to transpire, however. Instead, the Fed will most likely fall short of what is required and risk exacerbating the challenges it — and the economy — face in the longer term. (…)
Unfortunately, the policy transition will probably be delayed further given the interactions of the backward-looking framework, confirmation biases, active inertia and the extent to which reputations have already been invested in what has been a frequent reiteration of the two mantras of “transitory inflation” and “not thinking about thinking” about tapering. But the longer the Fed delays, the greater the threat it will be forced to slam on the policy brakes down the road. This would, in turn, risk both an economic recession and financial market instability. In addition to the undermining economic and social well-being, it would complicate the administration’s economic reforms and create adverse spillover effects for other countries, especially in the developing countries. (…)
But Reuters believes the Fed will say that they are thinking about starting to think about talking about “it”:
(…) Yet enough has changed in recent months – and may start to change at an even faster clip – that analysts expect the Fed to at least acknowledge the start of policy discussions that will eventually lead to a plan to first reduce the monthly $120 billion in bond purchases to zero and then start raising interest rates. (…)
- China to Release Metal Reserves in Effort to Tame Commodities Rally China plans to release national reserves of major industrial metals in an effort to rein in surging commodities prices fueled by a resumption of global economic activity.
The state stockpiling body, China’s National Food and Strategic Reserves Administration, said Wednesday that it plans to release copper, aluminum, zinc and other national reserves in batches in the near future to ensure the supply and price stability of bulk commodities.
Speculation that Chinese authorities would make such a move had pushed copper prices to an eight-week low on Tuesday, and investors worry Beijing may soon launch a broader push to temper rising prices.
The reserves will be released to nonferrous-metal processing and manufacturing companies via a public bidding process, the government agency said. (…)
U.S. Home Builders Index Declines in June
Back on trend after the surge, but traffic remains very strong.
Business Roundtable CEO Economic Outlook Index Signals U.S. Economy Back on Track, Reveals Record Hiring Plans
The overall CEO Economic Outlook Index increased in the second quarter to a value of 116, up nine points from Q1 2021, and only two points below the all-time high reached in Q1 2018 in the wake of pro-growth tax reform. All three subindices increased in the second quarter as well, with the sub-index measuring plans for hiring rising to historically high levels.
- Plans for hiring increased 15 points to a value of 103.
Source: Business Roundtable, Chart: Axios Visuals
- Plans for capital investment increased six points to a value of 106.
- Expectations for sales increased six points to a value of 140.
In their new estimate of 2021 U.S. GDP growth, CEOs project 5.0 percent growth for the year, a 1.3 percentage point increase from their estimate last quarter.
In a special question first posed in Q2 2020 and in each quarter since, 75 percent of CEOs say conditions for their companies have already recovered or will recover to pre-COVID-19 levels by the end of 2021—a two percentage point improvement from the prior quarter. Conversely, 25 percent of CEOs do not expect business conditions to recover until 2022 or later, down from 27 percent in the previous quarter, underscoring the continued challenges facing some industries as the global struggle against COVID-19. (…)
China’s factory output, retail sales miss expectations in May
(…) Chinese industrial production rose 8.8% in May from a year ago, slower than the 9.8% uptick in April, National Bureau of Statistics data showed on Wednesday, missing a 9.0% on-year rise forecast by analysts from a Reuters poll.
In particular, the output of auto vehicles fell 4% from a year earlier, compared with an increase of 6.8% in April, crimped by a global chip shortage. (…)
Retail sales rose 12.4% year-on-year in May, weaker than 13.6% growth expected by analysts and down from the 17.7% jump seen in April.
Chinese consumer and business confidence has been picking up thanks to pent-up demand and quickening vaccine rollouts, which are also reviving domestic tourism.
Two-year average growth for retail sales stood at 4.5% in May, faster than the 4.3% in April, in a sign that sales are gradually rebounding, Fu from NBS told reporters.
Fixed asset investment increased 15.4% in the first five months from the same period a year earlier, versus a forecast 16.9% rise, slowing from January-April’s 19.9% increase.
Notably, two-year average growth in manufacturing investment turned positive in May. (…)
China’s unemployment rate also continued to drop. Nationwide urban jobless rate fell to 5.0% in May, the lowest since May 2019, from 5.1% in April.
On a month-on-month basis, Capital Economics estimated industrial output growth was unchanged at 0.5%, the pace of investment spending eased slightly and retail sales picked up.
However, Reuters calculations showed real estate investment in May rose at its slowest pace this year as more smaller towns joined bigger cities in trying to curb red-hot housing prices. New construction starts fell for a second month. (…)
SENTIMENT WATCH
- Companies listed on the Nasdaq and NYSE have seen their share prices surge 33% on the first day of trading, according to Dealogic data. Compare that to May’s 23%. (Axios)
- Antitrust war escalates (Axios)
President Biden named tech critic Lina Khan, 32, to chair the FTC, making it clear the administration is dead serious about antitrust enforcement, Axios’ Ashley Gold and Margaret Harding McGill write. The White House took the industry and D.C. insiders by surprise by naming Khan the chair just hours after the Senate confirmed her as one of five commissioners.
The FTC is the likeliest leading edge of any major regulatory moves against Big Tech. Khan is a Columbia Law professor known for her argument that Amazon’s retail business should be separated from its selling platform.
