US Retail Sales Drop for Second Month as Tariff Anxiety Sets In
The value of retail purchases, not adjusted for inflation, decreased 0.9%, the most since the start of the year and restrained by autos, Commerce Department data showed Tuesday. That followed a downwardly revised 0.1% drop in April, marking the first back-to-back decline since the end of 2023.
In the retail sales report, seven of the 13 categories posted drops, dragged down by building materials, gasoline and motor vehicles — which came after a buying spree in anticipation of tariffs. Spending at restaurants and bars, the only service-sector category in the retail report, fell by the most since early 2023.
After loading up on purchases for cars and other goods to front-run President Donald Trump’s tariffs, the figures suggest consumers are now pulling back spending. (…)
The retail data showed so-called control-group sales — which feed into the government’s calculation of goods spending for gross domestic product — increased 0.4% in May, supported by gains in sporting goods, furniture and apparel. The measure excludes food services, auto dealers, building materials stores and gasoline stations. (…)
Two-handed economists will say that retail sales up 3.3% YoY is so shy of the 5% increase in labor income that it surely reflects a pull back in spending intentions that will get worse as tariff inflation kicks in.
On the other hand, it was mainly cars (-3.5% MoM) and gasoline (-2.0%); control sales rose exactly 5.0% YoY, so no worries.
Source: U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Economics
Monthly data is also inconclusive as one could have expected more of a pull back after large front loading in February and March control sales:
Furniture stores sales rose 1.2% MoM and are up 8.8% YoY, supporting the “mainly cars” narrative. Nonstore sales jumped 0.9%, also up 8.3% YoY and sporting goods rose 1.3% after very slow months (+1.8% YoY). In all, discretionary spending ex-cars still looks solid.
Importantly, retail inflation is zero YoY and –3.0% annualized in May. Goods consumption is still in!
ING notes that retail sales accounts for only 42% of total consumer spending. I added the dashed line to highlight the declining trend as the US is increasingly a service economy.
BTW:
Business activity in the region’s service sector continued to decline in June, according to firms responding to the Federal Reserve Bank of New York’s Business Leaders Survey. The survey’s headline business activity index edged up three points but held below zero at -13.2.
The business climate index remained firmly negative at -48.3, suggesting the business climate continued to be considerably worse than normal.
Employment edged slightly lower, and wage growth dropped to its slowest pace in more than four years
U.S. Import Prices Held Steady in May
Import prices are taken at the point of departure and therefore exclude duties, such as tariffs recently imposed on imports by the Trump administration.
Imported fuel prices slumped 4.0% in May, stronger than the 2.6% decrease in April, driven by lower petroleum and natural-gas prices in the period, the Labor Department said.
However, the fall there was offset by nonfuel imports, which advanced 0.3%. Higher prices for nonfuel industrial supplies, capital goods, consumer goods and vehicles more than offset lower prices for foods, feeds and beverages, according to the Labor Department.
Non-fuel import prices rose 0.3% MoM after +0.4% in April, +4.3% annualized in the last 2 months. They were up 0.4% a.r. in Q1.
Ex-food and fuel, import prices rose 0.4% in May after +0.5% in April, +5.5% a.r..
Import prices from China decreased 0.2% in May. They declined 2.0% over the past 6 months and have not increased on a monthly basis since rising 0.4% in October 2022. Prices for imports from China decreased 2.1% YoY, the largest YoY decline since the index fell 2.1% for the year ended April 2024.
The price index for imports from the European Union rose 0.4% in May following a 0.2% advance in April.
US Industrial Output Declines for Second Time in Three Months
The 0.2% decrease in production at factories, mines and utilities followed a revised 0.1% gain a month earlier, Federal Reserve data showed Tuesday. The median estimate of Bloomberg survey of economists called for no change.
Manufacturing output edged up 0.1%, mostly due to a pickup in motor vehicle assemblies, after declining a month earlier by the most since October. Production at utilities declined 2.9%, while mining and energy extraction was slightly higher. (…)
The slight increase in May factory output reflected a nearly 5% advance in auto production, while aerospace equipment also climbed, according to the Fed. Motor vehicle assemblies increased to an annualized 11.19 million, the fastest in more than a year.
Excluding motor vehicles, factory production dropped for a second month on declines in machinery and fabricated metals.
Production of consumer goods, which includes cars, appliances and electronics, declined for a third straight month, while output of business equipment accelerated.
Japan’s Exports Fell for First Time in Eight Months as Tariffs Weighed Exports fell 1.7% in May from a year earlier
(…) Wednesday’s data showed that exports to the U.S. dropped 11.1% in May due to weakness in shipments of cars, auto parts and chip-making machinery. Japan’s trade surplus with the U.S. shrank 4.7% from a year earlier, marking the first decline in five months.
The value of U.S.-bound automobile exports fell more sharply than the volume, the figures showed, suggesting that Japanese automakers are trying to contain tariff costs on their own by making significant price cuts, said Taro Saito, an economist at NLI Research Institute. (…)
“The series of tariff measures taken by the U.S., which accounts for approximately a quarter of global GDP and about 20% of Japan’s exports, are damaging profits of many Japanese companies, including the auto industry,” Ishiba said.
“These measures could also have significant direct and indirect effects on both Japan and the U.S., and the global economy,” he added. (…)
In another sign of weakening demand and sentiment potentially tied to the uncertainty, core machinery orders—excluding for ships and power equipment—dropped 9.1% on the month in April. That compared with March’s 13% rise, separate government figures showed Wednesday.
“Even if Japan and the U.S. reach a deal that softens some of the more punitive U.S. tariffs, a full return to pre-Trump trade terms is unlikely,” said Moody’s Analytics economist Stefan Angrick.
“Japan’s manufacturers are deeply integrated into global supply chains, so trade policy flip-flops pose a threat to global growth,” he added.
China’s central bank chief expects new currency order to challenge dollar
China’s central bank governor has said he expects a new global currency order to emerge after decades of dominance by the US dollar, with the renminbi competing in a “multi-polar international monetary system”. (…)
“In the future, the global monetary system may continue to evolve towards a pattern in which a few sovereign currencies coexist, compete with each other, and check and balance each other,” he said, pointing to a growing role for the renminbi. (…)
The renminbi, he noted, was the world’s second-largest trade finance currency and third-largest payment currency. (…)
His comments coincided with multiple announcements on Wednesday related to China’s push for a more renminbi-centred currency system, including an international operation centre for the digital renminbi in Shanghai.
Six foreign institutions, including Singaporean bank OCBC and Kyrgyzstan’s third-largest lender Eldik Bank, also said they would join China’s Cross-Border Interbank Payment System (Cips), an alternative to the Swift global payment system. (…)
From Bloomberg:
The dollar is having a shocker of a year, down more than 10% against the euro, pound and Swiss franc.
As Bloomberg’s Big Take suggests today, much of the decline is being driven by Donald Trump’s agenda, be it the risk posed to budget deficits by his tax cuts or the threat to growth and trade from his tariff push.
Attacks on the Federal Reserve, a so-called revenge tax on international investors and the wielding of bare-knuckled legal tactics against opponents aren’t helping either.
Here are some of the metrics to show the greenback’s fall may continue:
- Fund managers are underweight the dollar by the most in 20 years, which suggests “the biggest summer pain trade is long the buck,” according to a Bank of America poll.
- A survey of central banks by the World Gold Council found 73% expect their holdings of the dollar to fall moderately or significantly over the next five years. (China’s top central banker today laid out his vision for a new global currency order, predicting a more competitive system will take root.)
- Pension funds and insurers have historically low protection against currency volatility and a reversal would spell “additional significant negative flow” from the greenback, says Deutsche Bank.
- Increasingly, exporters no longer want to be paid in dollars, according to the head of currency sales for US Bancorp.
- A traditional correlation between Treasuries and the dollar has broken down too, with the greenback falling even as bond yields climb.
(…) Asked whether the administration was concerned about the dollar’s recent declines, a Treasury spokesperson pointed to this historical context, noting it’s stronger today than it’s been on average over the past four decades.
But what’s surprising to some market watchers is that Trump and his team seem indifferent to their currency’s plunge, beyond expressing the traditional support for a “strong dollar.” They are also accused of favoring the fall, given that a devaluation might help American manufacturers.
This is a dangerous game. With Uncle Sam’s annual financing needs now topping $4 trillion, a retreating dollar risks putting off international creditors. If things get bad enough, a vicious cycle could kick in as foreigners flee, pushing borrowing costs up and the dollar down even further.
Yesterday, I posted Christine Lagarde’s FT piece (some excerpts):
(…) the shift under way also offers opportunities for Europe to take greater control of its own destiny and for the euro to gain global prominence. At present, the euro is the world’s second most-used currency, accounting for 20 per cent of global foreign exchange reserves, compared with 58 per cent for the US dollar.
Increasing the euro’s global status would bring tangible benefits: lower borrowing costs, reduced exposure to currency fluctuations and insulation from sanctions and coercive measures. (…)
For the euro to reach its full potential, Europe must strengthen three foundational pillars: geopolitical credibility, economic resilience, and legal and institutional integrity. (…)
