US Retail Sales Surge in Broad Advance, Topping Estimates
The value of retail purchases, not adjusted for inflation, increased 0.6% after declines in the prior two months, Commerce Department data showed Thursday. That exceeded nearly all estimates in a Bloomberg survey of economists. Excluding cars, sales climbed 0.5%.
Ten out of 13 categories posted increases, surprisingly fueled by motor vehicle sales, which climbed after back-to-back declines. Administrative data showed car sales fell in June and prices for new and used vehicles were down in the latest inflation data, defying economists’ expectations for autos to weigh on the headline retail figure. (…)
The retail sales report showed so-called control-group sales — which feed into the government’s calculation of goods spending for gross domestic product — rose 0.5%, rounding out the first half of the year on a strong note. The measure excludes food services, auto dealers, building materials stores and gasoline stations.
The retail sales figures largely reflect purchases of goods, which comprise roughly a third of overall consumer outlays. Inflation-adjusted spending data on goods and services for June will be released later this month.
Spending at restaurants and bars, the only service-sector category in the retail report, advanced 0.6%.
Nominal retail sales were up 3.9% YoY in June and 4.0% for Q2, down from 4.5% in Q1. Aggregate weekly payrolls, the best spending proxy, rose 4.9% in Q2 (4.6% in June), in line with the previous 6 months. Americans are still consuming but somewhat more cautiously.
There is no official real retail sales data so I constructed my own inflation proxy (.35x CPI-Durables + .65x CPI-Nondurables). Retail inflation rose to +0.4% MoM in June after being –0.1% in April-May on average. So real sales are up 0.26% in June or 3.2% annualized, in line with Q2 as a whole, a sharp improvement from Q1 (-1.5% a.r.) which benefitted from large advanced buying in March.
In the first half of the year, real sales rose 3.9% YoY but only 1.8% sequentially annualized, down sharply from +3.5% YoY (+5.8% a.r.) in the 2024 second half.
Consumers have benefitted from declining gasoline prices, freeing up not insignificant disposable dollars:
Few Signs of Foreign Exporters Absorbing U.S. Tariff Hikes
(…) After several escalations, delays and negotiations, we estimate the effective tariff rate is roughly 16% today, up from 2% in 2024.
As a reminder, tariffs are a tax on goods paid by U.S. importers. There are a few ways the cost can be distributed, as we discussed in a report earlier this year. Domestic firms can pass it along via higher selling prices, absorb it via profit margin compression or a combination of the two.
Yet, even before products arrive at U.S. docks, foreign suppliers can also indirectly shoulder higher tariffs by lowering their list prices to ameliorate the total cost burden faced by domestic firms. Exporters may provide such relief to maintain market share.
In June, import prices excluding fuels were up 1.2% year-over-year and running at an annualized rate of 1.9% over the past three months. The lift has not been driven by tariffs themselves. Since the Import Price Index is primarily used to calculate the inflation-adjusted value of imports in GDP, it excludes tariffs from the prices paid by importers because the income generated from tariffs is transferred to the federal government, not the importing firm.
If foreign exporters were absorbing the cost of tariffs, import prices would be declining in proportion to the rise in the tariff rate. A look at import prices through June, however, shows prices excluding fuel marginally higher, rather than lower, where they would have been had they continued to rise in line with their recent trend. Thus, the recent rise in import prices points to foreign suppliers generally resisting price cuts.
Underneath the surface, some of the recent strength in import prices has been driven by skyrocketing precious metal prices, especially for gold and silver, as elevated uncertainty has supported demand for safe-haven assets. Beyond metals, import prices for food, non-durable supplies & materials and a selection of consumer goods are also running ahead of their recent trends, suggesting foreign exporters are not shouldering the cost of higher tariffs on these products.
Weaker auto prices relative to trend, on the other hand, likely reflect some foreign exporters discounting prices in an effort to move inventory in the face of sluggish domestic sales recently.
Across categories of import prices, roughly half are running below their pre-tariff trends, while the other half are in line with or above those levels. The mix is reflective of variations in product-specific and country-level factors, with half of all import price categories having risen in price since the start of the year.
So why is overall import price inflation holding up? For one, the scramble for imports ahead of new tariffs strained global supply chains and led to a pickup in shipping costs that foreign exporters could have baked into their prices depending on the nature of their trade contracts.
The dollar’s slide has also played a major role. Approximately 95% of the nation’s imports are denominated in U.S. dollars, and the Federal Reserve’s trade-weighted dollar index is down 6.3% since the start of the year and 2.5% from a year ago. The broad depreciation has likely incentivized foreign suppliers to bump up their invoice prices, as dollar-denominated revenues are not stretching as far when translated to their home currencies.
With little relief from import prices, domestic firms are stomaching the cost of higher tariffs and starting to pass it on to consumers. Excluding vehicles, the core goods CPI posted its strongest monthly increase since February 2022 in June, with widespread gains across furniture, apparel, motor vehicle parts and recreational items.
U.S. firms also appear to be absorbing some of the additional product cost brought on by tariffs. The trade services component of the Producer Price Index, which is a measure of product margins for wholesalers and retailers, has slowed sharply in recent months, illustrative of margin compression.
Looking ahead, import price growth has room to weaken but is unlikely to plunge. Foreign purchasing manager surveys indicate weaker manufacturing activity in Canada and China since the beginning of the year, but stronger activity across the Eurozone and Mexico.
The mix suggests some exporters may be amenable to cut prices while others may be inclined to hold the line. Although softer consumer spending in the United States could weigh on foreign production and encourage more exporters to cut their prices in the second half of the year, our expectation for the dollar to continue weakening over the same time frame will likely counteract the deflationary impulse from weaker demand. In short, import prices are unlikely to be a relief valve for consumer price inflation in the months ahead.
Some import prices: last 3m a.r., June YoY (%)
- All imports excluding food and fuels: 3.3 1.0
- Industrial supplies & materials excluding fuels: 3.7 4.3
- Industrial supplies & materials, durable: 8.5 5.7
- Unfinished metals related to durable goods: 13.0 5.7
- Finished metals related to durable goods: 19.3 12.3
- Capital goods: 3.6 1.0
- Automotive vehicles, parts & engines: 0.8 0.9
- Nondurables, manufactured: 1.6 -1.2
- Durables, manufactured: 2.0 –0.1
The consumer side has been spared for the most part so far but there is acceleration. Industrial prices are exploding. Remember, import prices do not include tariffs.
China Lifts Exports of Rare-Earth Products After Trade War Curbs
China’s exports of rare-earth products jumped in June, pointing to a potential pickup in magnet supplies after government-imposed curbs that proved to be Beijing’s most powerful weapon in its trade war with the Trump administration.
Customs data released Friday show exports of all rare-earth products rose 80% from a five-year low in May, when the country was in the midst of implementing sweeping export controls. Magnets — a component central to recent trade tensions — typically form the bulk of the “products” category, but detailed export data on those won’t be available until Sunday at the earliest. (…)
- U.S. greenlighted H20 chips export on its own initiative, China says Beijing clarifies its deal with Washington didn’t include NVIDIA’s 4th-best AI chip, disputing widely-reported comments by U.S. Commerce Secretary Howard Lutnick
In a statement dedicated to the recent U.S. approval of the semiconductor giant’s 4th-best Artificial Intelligence chip, China’s Ministry of Commerce said on its website that in early July, the U.S. had already lifted restrictions on China under the agreement reached between the two countries in London. (…)
Beijing’s clarification stands in stark contrast to widely reported public comments earlier this week by U.S. Commerce Secretary Howard Lutnick, who told Reuters on Tuesday that “We put that in the trade deal with the magnets,” referring to the agreement made to restart Chinese rare earth shipments to U.S. manufacturers. (…)
China Snack Maker Seeks Government Support After 45% Price Cut
A Chinese snacks maker that cut prices by 45% now plans to make the local government its largest shareholder, in a sign of how bruising deflation in the world’s second-biggest economy is claiming corporate casualties and requiring growing state intervention.
Ningbo Hanyi Venture Capital Partnership Enterprise LP, which currently holds more than 35% of Wuhan-based Bestore Co., along with another investor plans to sell a combined 21% to an entity owned by the local government. The transaction will be valued at about 1.05 billion yuan ($146 million), according to a statement to the Shanghai stock exchange.
Bestore, which sells dried fruits, crackers and puffed snacks, was the first premium snack food retailer to list in the Shanghai stock exchange in 2020. The company has seen its revenue decline since 2022 as a price war swept the market, with losses expected to have touched at least 75 million yuan in the first-half of this year.
The competition to lure consumers with ultra-low prices has hurt the viability of businesses from coffee chains to electric vehicle makers in China. The Chinese government and industry groups stepped in to urge an end to the so-called “involution,” or cutthroat rivalry.
President Xi Jinping earlier this month chaired a meeting where the government pledged to crack down on “disorderly” price competition. China Chain Store & Franchise Association urged its members and platform companies to desist from price wars.
Bestore, in late 2023, announced cutting snack prices by up to 45% to win over consumers in a weak economic environment.
‘The Turbulence Is Brutal’: Four Shark Tank Businesses on Tariffs Despite the wild swings in trade policies, these entrepreneurs say the math on reshoring doesn’t work for them.
(…) We spoke to four Shark Tank company founders to learn how they’re navigating the made-for-TV drama of Trump’s tariff changes and whether the policies are causing them to reevaluate their supply chains.
- (…) we started manufacturing them in China. It was just so much easier. You know, you tell them what you want, and they do everything. They’re very easy to work with over there, and it’s, I mean, really it’s the only feasible option. And so we’ve been in China for four-and-a-half years. (…) I can’t price things correctly, because I don’t know what’s going on. There’s no clarity on it whatsoever. Is there a trade deal? Is there not a trade deal?
- (…) I have been working with this particular factory in Fujian province for about eight years. They’re phenomenal. (…) I usually import a 40-foot container, and it’s about $150,000, so the duties are an additional $18,900. I obviously can’t offer the prices that I gave to Walmart and Tractor Supply and Lowe’s with ridiculous tariffs like 145% or even 30%. I don’t have those kinds of margins, so I don’t know if I’m going to be able to reorder. So that’s the unknown.
I spent about $10,000 this year in R&D to see if I can bring manufacturing to the United States. The US mold would cost about $65,000 versus $26,000 in China. And the resin still has to be imported. (…) I want an American product. At this time, it’s just not feasible. What could make it feasible is if the US offered some sort of stipend or incentive for small to medium-size businesses, kind of like how China helps companies.
If the objective is bringing manufacturing back to the US, then why in the world would Trump allow Apple and Microsoft to have exemptions and not those of us who are small and medium-size businesses?
- We originally partnered with a US-based 3D printing company to build our printers, but the price was twice what we could get in China. (…)
A lot of people think you can just move these supply chains over. It’s not that simple. If we were creating textiles or something, that’s pretty easy to move somewhere to, you know, like Vietnam. For something like a 3D printer, there’s these levels of the supply chain that are all based in China.
The motors are made out of wires, which are all made in China, and then magnets. China owns like, you know, 95% of the world supply of magnets. So the sad thing is even with these heightened tariffs, it’s still cheaper to produce it in China.
I’m confident we can navigate this. It’s just the turbulence is pretty brutal. I think the real company killer is these sudden changes really give no room for being able to react. We don’t know if tariffs are going to be 30%, we don’t know if it’s going to go back down to 10%. We don’t know if it’s going to shoot back up to 145%, right? We’re like, who the f— knows what’s going to happen after 90 days?
EU Agrees to Start Talks With Gulf Nations on Strategic Ties
European Union member states approved the launch of negotiations with six Gulf countries as the bloc seeks to broaden its international partnerships amid tariff threats from President Donald Trump.
European affairs ministers gave the green light to the opening of talks aimed at concluding bilateral Strategic Partnership Agreements with Gulf Cooperation Council countries, which include Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, during a meeting in Brussels on Friday, according to people familiar with the discussions, who spoke on the condition on anonymity.
Negotiations are expected to begin as soon as possible and to address a broad spectrum of issues, including security and energy, as the EU is stepping up efforts to diversify relationships and reduce its dependence on the US in response to Trump’s unpredictable trade policies. (…)
This latest advance on fostering stronger ties between the two economic regions follows a recent agreement between the EU and the UAE to begin free trade negotiations aimed at removing trade barriers and fostering economic integration.
Trump Orders New Red Tape for Wind and Solar on Federal Land
Wind and solar projects being constructed on federal land will be required to undergo a new review process at the Interior Department, under a new Trump administration directive that could slow the approval of projects.
The directive, announced Thursday, will require sign-off from the Office of Interior Secretary Doug Burgum following an elevated review of decisions related to leases, rights-of-way, construction, operation plans, grants and more, the department said in a statement.
The announcement, which follows a deal struck with members of the ultra-conservative House Freedom Caucus over subsidies for renewables in exchange for their support of President Donald Trump’s massive tax and spending package, comes as the administration has lambasted renewable energy and favored fossil fuels.
The Interior Department said the action was needed to end “preferential treatment for unreliable, subsidy-dependent wind and solar energy” and also included a move to “eliminate longstanding right-of-way and capacity fee discounts for existing and future wind and solar projects, bringing an end to years of subsidies for economically unviable energy development.” (…)
In April, Burgum halted work on Equinor ASA’s $5 billion Empire Wind farm off the coast of New York, but then reversed the decision a month later after the administration reached a deal with New York Governor Kathy Hochul to open the way for new gas pipelines to be built in the state. Torgrim Reitan, Equinor’s chief financial officer, said in an interview<?XML:NAMESPACE PREFIX = “[default] http://www.w3.org/2000/svg” NS = “http://www.w3.org/2000/svg” /> last month that further investments in US offshore wind are likely off the table.
Interior’s new policy will delay the build out of solar and wind projects on federal land by lengthening project and construction approvals, Capstone LLC, a consulting firm, said in a note to clients Thursday.
“The Secretary of the Interior will apparently now be personally reviewing thousands of documents and permit applications for everything from the location and types of fences to the grading of access roads on construction sites across the country, ” Jason Grumet, the American Clean Power Association’s chief executive officer, said in a statement.
The move was panned by environmental groups including Evergreen Action, which characterized it as a “politically motivated attack.”
“Let’s speak plainly: This is economic sabotage,” said Lena Moffitt, the group’s executive director. “We can’t afford to let this administration bully an American grown industry out of existence to protect their fossil fuel backers.”
Waller Says Fed Should Cut Rates Now With Labor Market on Edge
“With inflation near target and the upside risks to inflation limited, we should not wait until the labor market deteriorates before we cut the policy rate,” he said Thursday in the text of a speech prepared for an event hosted by the Money Marketeers in New York. “I believe it makes sense to cut the FOMC’s policy rate by 25 basis points two weeks from now.”
Fed officials will gather July 29-30 in Washington.
Waller’s remarks set him apart from most of his fellow policymakers, who have characterized the employment landscape as still solid.
“Looking across the soft and hard data, I get a picture of a labor market on the edge,” he said. (…)
Waller is one of two Fed officials, alongside Vice Chair for Supervision Michelle Bowman, who had already signaled their openness to cutting rates as early as this month.
He had previously differentiated himself from other officials by saying he believed the impact of tariffs on inflation would be temporary, and he repeated that view Thursday. (…)
Waller said inflation expectations remain anchored and wage growth isn’t accelerating, easing concerns of a persistent inflation effect.
He said the risk of a weaker jobs market is “greater and sufficient” to cut interest rates.
“The economy is still growing, but its momentum has slowed significantly, and the risks to the FOMC’s employment mandate have increased,” he added.
He said he expects the economy to “remain soft” for the rest of 2025 after growing at about a 1% pace in the first half of the year.
Several other policymakers, including Governor Adriana Kugler and New York Fed President John Williams, have expressed more concern about the potential impact of tariffs on inflation and have said they’d prefer to wait longer before lowering rates. (…)
Waller has been among the names touted to succeed Jerome Powell at the head of the central bank when his term as chair expires in May. Trump, who will nominate Powell’s successor, has been demanding lower rates from the Fed. (…)
Federal Reserve Bank of San Francisco President Mary Daly said she still thinks it’s reasonable for policymakers to plan on two interest-rate cuts this year, emphasizing that the central bank should not wait too long before moving.
Daly said businesses are so far tolerating President Donald Trump’s tariffs and consumers are still spending, which has allowed the Fed to maintain rates while inflation moves toward their 2% target.
“At the same time, you can’t wait forever, because if we wait til inflation is 2%, well then we’ve lost, we’ve likely injured the economy in some way that was completely unnecessary,” Daly said Thursday in an interview with Michael McKee on Bloomberg TV at the Rocky Mountain Economic Summit in Victor, Idaho. (…)
Earlier Thursday, Fed Governor Adriana Kugler said the central bank should keep holding rates steady “for some time,” citing accelerating inflation as tariffs start to boost prices.
Speaking Wednesday evening, New York Fed President John Williams said a restrictive stance is “entirely appropriate” as officials await bigger tariff-induced price increases in the months ahead. (…)
Summers Warns of ‘Massive Inflation Psychology’ From Trump Rates
Former Treasury Secretary Lawrence Summers warned that President Donald Trump’s bid to assert control over the Federal Reserve and drive down interest rates could trigger a surge in inflation expectations that pushes up long-term borrowing costs.
“I’m not aware of any economist anywhere near the mainstream who is supporting anything like 1% rates in the current environment,” Summers said on Bloomberg Television’s Wall Street Week with David Westin. Such a move “might create some temporary boom in the economy, but would do so at the cost of a massive inflation psychology.” (…)
Summers said that the administration’s policy mix is sowing the risk of a dangerous circular dynamic of large deficits leading to increased longer-term borrowing costs, which then push up budget deficits even further, causing rates to rise again.
The former Treasury chief pointed to signs of concern in the bond market, where longer-term expectations for Treasury yields are elevated — “ominous indicators about our nation’s credibility over the medium term.”
A one-year forward measure of the yields on 10-year Treasury inflation-linked notes has surpassed 3% in recent months. That gauge, which implicitly strips out any volatility over the coming year, has averaged about 2% since the start of the century. A one-year forward measure of regular 30-year Treasury bond yields is now around 5%, compared with an average around 4.3% in the 2000s. (…)
These market gauges are “ominous indicators with respect to the government’s ability to issue long term debt. They’re ominous indicators with respect to the deficit.” (…)
“If you look at what’s happened to bond markets, if you look at what’s happened to the dollar, you have to view our nation’s fiscal situation with considerable trepidation and concern,” Summers said. An index of the dollar fell the most in the first half of the year since 1973.
Speaking after data this week showed smaller-than-expected increases in some measures of prices for June, Summers said “I would have expected more inflation” to be showing up from tariff hikes. But it’s “early days,” he said. “I wouldn’t want to rush to a judgment that these tariffs are innocuous for inflation. I think the more likely thing is that they’re going to be somewhat more delayed in their impact.”