Retail Sales Growth Was Strong in July With Good Details; Consumers Continue to Spend
PNC Chief Economist Gus Faucher
- Retail sales increased 1.0% in July from June. Details were solid, with a 0.4% increase in core sales.
- Sales fell slightly in June after revisions, but the details were better.
- The cyberattack led to a big drop in auto sales in June, but there was a bounce back in July.
- Consumer fundamentals are good in mid-2024 but softening somewhat. PNC expects more modest growth in retail sales through the rest of this year and into 2025.
Retail sales increased a strong 1.0% from June to July, according to the advance estimate from the Census Bureau. June sales were revised lower, from no change to a 0.2% decline. Sales growth in May was revised down slightly to a 0.2% increase, from a 0.3% increase.
Sales excluding motor vehicles and parts were up 0.4% in July, with sales excluding autos and gasoline (core sales) also up 0.4%. Control retail sales—sales excluding autos, gasoline, building materials, and food service, and which go into nominal consumer spending in GDP—rose 0.4% in July, after a 0.9% increase in June.
On a year-ago basis total retail sales were up 2.7% in July, an acceleration from 2.0% growth in June. Core retail sales were up 3.4% in July, compared to 3.6% growth in June. Gasoline sales were down about 2% year-over-year in both June and July because of lower prices, pulling down the headline number.
Consumer spending continues to increase at a solid pace in mid-2024. Sales rose in July at a decent pace and the details were good as well, with a 0.4% increase in core sales and a 0.8% increase in control sales. Headline sales have increased in four of the past six months, and core retail sales have increased in five of the past six months. Total sales were down slightly in June, but that was due to a drop in auto sales, because of the CDK Global cyberattack against auto dealers, and lower gasoline prices.
The fundamentals for consumer spending are good in the summer of 2024, but are gradually softening. The labor market is strong, but not as strong as it was last year, with softer job and wage gains and a rising unemployment rate. Slowing inflation means that real (inflation-adjusted) wages are increasing. Household wealth is at a record high with rising home values and stock prices. And interest rates are set to move lower as the Federal Open Market Committee is signaling a cut in the federal funds rate at their next meeting, on September 18, with further rate cuts to come. But there are some concerns, including rising delinquency rates for consumer credit and a low saving rate. Low- and middle-income households are facing more stress than upper-income ones, as they have not benefited as much from rising home and stock prices.
PNC expects a slowing in growth in consumer spending through the rest of 2024 and into 2025 as a further softening in the labor market and a need to increase savings weighs on household purchases. But spending is not expected to decline.
Spending at auto and parts dealers rose 3.6% in July from June as auto sales bounced back after falling 3.4% in June with the cyberattack, to slightly above their May level. Sales at gasoline stations were up 0.1% over the month. Sales at restaurants and bars increased 0.3% in July, have been up in five of the past six months, and increased 3.4% year-over-year in July. This spending is more discretionary, and the ongoing strength is a positive signal for consumer purchases. Spending increased in most categories in July from June, with notable gains for electronics and appliances (up 1.6%), grocery stores (up 1.0%), building materials (up 0.9%), health and personal care (up 0.8%), general merchandise (up 0.5%), and furniture and home furnishings (up 0.5%). There were declines for clothing stores (down 0.1%), special stores (down 0.7%), and miscellaneous stores (down 2.5). Nonstore retail sales (online and catalog) increased 0.2% in July.
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Industrial Production Down 0.6% in July With Drags from Beryl and Autos; High Interest Rates Remain a Drag
PNC Chief Economist Gus Faucher
- Industrial production fell 0.6% in July, with about one-half of the decline due to Hurricane Beryl. There was also a big drop in auto production over the month.
- Industrial production has been flat for more than two years, weighed down by high interest rates.
- Industrial activity will remain weak in the near term but should pick up somewhat next year with expected Fed interest rate cuts.
- There are few inflationary pressures coming from the industrial side of the economy.
Industrial production fell 0.6% in July from June according to the Federal Reserve. Hurricane Beryl, which caused plant closures in the Gulf area, accounted for about one-half of the drop in output over the month. Manufacturing output fell 0.3% in June, with no change in mining output and a 3.7% drop in utilities output as weather patterns were more seasonal after an especially hot June. Industrial production increased 0.3% in June, revised lower from a 0.6% increase.
On a year-ago basis total industrial production was down 0.2% in July, with a 0.1% increase in manufacturing, a 1.5% drop in mining, and a 0.1% decline in utilities.
Total industrial production and manufacturing output have both been essentially flat since the spring of 2022 after a very strong recovery following the pandemic. Total output is close to its pre-pandemic peak, while manufacturing output is slightly below it.
The total capacity utilization rate fell to 77.8% in July from 78.4% in June. The manufacturing rate fell to 77.2% in July from 77.5% in June.
The industrial sector in the U.S. is treading water in mid-2024. Output plunged during the pandemic and then surged in the early stages of the recovery. But consumer spending on goods has been basically flat for a few years, and high interest rates have been a drag on capital goods and building materials. The strong dollar has also weighed on U.S. industrial output.
Industrial production will remain flat in the near term as economic growth softens in the second half of this year as high interest rates remain a drag. Output should pick up modestly in 2025 as Federal Open Market Committee cuts to the federal funds rate lead to a reacceleration in economic activity. PNC expects an FOMC rate cut at the committee’s next meeting, on September 18, with additional rate cuts through the rest of this year and in the first half of next year.
There is still a fair amount of excess capacity in the industrial sector; this is helping to contain inflationary pressures. According to the consumer price index, core consumer goods prices (excluding food and energy) were down 1.9% in July from a year earlier.
Auto production was down 8% in July from June. The automakers typically retool their plants over the summer leading to big fluctuations in auto output. Manufacturing output excluding autos was up 0.3%. Production of chemicals fell more than 1% in July with temporary closures of chemical plants in Texas due to Beryl.
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Initial Claims Decline by 23K in the First Two Weeks of August Suggesting That the Rise in July was Overstated
PNC Senior Economic Advisor Stuart Hoffman
- Initial claims for unemployment insurance fell by 7,000 in the week ending August 10, partly reflecting a 2K decline in Texas as the aftermath of Hurricane Beryl returns to normal and a 2K decline in California.
- Continuing claims for unemployment insurance fell by 7,000 in the week ending August 3 but the four-week moving average rose by 1,000.
- The labor market remains solid, but hiring is slowing as noted by Fed Chair Powell and as shown by the relatively smaller payroll job rise in July.
- The labor market will soften further in the latter half of 2024, with smaller job gains and a slightly higher unemployment rate.
Initial claims for unemployment insurance fell by 7,000 in the week ending August 10, partly reflecting a 2K decline of initial claimants in Texas as the aftermath of Hurricane Beryl is returning to normal.The four-week moving average of initial claims, which smooths out some of the seasonal and weather-related volatility, fell by 4,500 to 236,500. The week we are in now ending August 17 is when the Labor Department takes its survey for the August jobs report. We expect that report will show a somewhat better labor market in both jobs added and hours worked than in July.
Initial claims have moved higher in 2024 after starting the year at an historically low 200,000. Over the past couple of years initial claims have risen and fallen, and there was a similar increase in the first half of 2023, which was followed by an unwinding in the second half of last year. July is a particularly difficult month to seasonally adjust initial claims since widespread temporary layoffs in the vehicle industry for retooling have greatly varied in the last three Julys following the complete shutdown in 2020 for Covid. The reduction in initial claims in the first two weeks of August strongly suggests thar the rise in initial claims in July was overstated!
Continuing claims for unemployment insurance fell by 7,000 to 1.864 million in the week ending August 3 from a downward revised 1.871 million (was 1.875 million) in the previous week. The four-week moving average of continuing claims rose by 1,000 to 1.862 million. This is the highest level for the four-week average since December 2021. The message from continuing claims is clear. They are up from their levels in the second half of 2022, all of 2023 and the first five months of 2024. Although the labor market is historically strong, it is taking somewhat longer for unemployed workers to find jobs. This is consistent with the June Job Openings and Labor Turnover Survey, or JOLTS report, and the relatively smaller rise of 114,000 payroll jobs in July.
The labor market is still historically strong, but not quite as strong as it was in 2022 and 2023. Chair Powell recently said that the labor market is back to a balance between slower demand and rising labor supply. Job growth has eased and the unemployment rate is somewhat higher than it was in early 2023, when it hit 3.4% for a couple of months. PNC expects a further easing in the labor market through the rest of this year as high interest rates continue to weigh on the economy. PNC is forecasting job growth to slow to around 150,000 per month in the latter half of this year and closer to 100,000 in the first half of 2025, and the unemployment rate will increase somewhat over the next year to about 4.5%.
In response to the FOMC gaining greater confidence in the clear slowdown in inflation the last four months and the slower pace of job growth raising downside risks to the economy as noted in the FOMC’s July 31 meeting statement, PNC expects the FOMC to cut the funds rate by 25 bps points at their September 18, November 6, and December 18, 2024 meetings followed by three more 25 bps rate cuts in the first half of 2025.
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U.S. Homebuilder Confidence Drops for Fourth Straight Month in August, Remains in Contraction; Falling Mortgage Rates Over the Next Several Months Will Support Housing Demand
PNC Chief Economist Gus Faucher
- Homebuilder confidence fell for a fourth straight month in August and has also been below the 50 level that indicates expansion for the past four months.
- Homebuilder confidence dropped in the Northeast and South in August and was flat in the Midwest and West.
- Homebuilders were pessimistic about current sales and traffic of potential buyers, but the sales expectations component rose slightly.
- PNC expects housing market activity to soften further in the near term, but gradually recover in late 2024 and 2025 as mortgage rates fall.
The seasonally-adjusted Housing Market Index (HMI) fell for a fourth straight month in August to 39 from 41 in July, according to the National Association of Home Builders (NAHB) and Wells Fargo. The HMI tracks sentiments among single-family homebuilders. A reading of above 50 indicates that a majority of builders are confident about the housing market. The HMI in August dipped to its lowest level since last December, is lower than it was through most of 2023, and has been below 50 for four consecutive months.
Homebuilder confidence is down sharply from its post-pandemic peak in late 2020. High mortgage rates have been a drag on residential construction. The typical 30-year mortgage rate remains elevated at around 6.5% currently, although it is down from a peak of almost 8% in the fall of 2023. Homebuilder confidence dropped in the Northeast and South in August. The HMI in the Northeast dropped to 46 in August from 47 in July and 62 in June. Despite the drop the HMI in the Northeast is still the highest among all four regions, and is above its long-run average of 43. The HMI in the South dropped four points in August to 39. The HMI in the Midwest was flat at 39 in August, and in the West was flat at 37. Over the past year homebuilder confidence is down in all four regions.
The present sales conditions and traffic of prospective buyers components continued to fall in August following their declines in July; both fell two points each in August, to 44 and 25, respectively. Expectations for single-family new home sales over the next six months increased for a second straight month in August, however, as homebuilders expect lower mortgage rates and an easing in Federal monetary policy will bring some relief to homebuyers. The expectations component is just barely in contraction at 49.
PNC expects the Federal Reserve to cut the federal funds rate in September and then again at each of its next few meetings. Easing mortgage rates over the next year will support housing demand, leading to better affordability and alleviating stresses over short single-family inventories by late 2024. PNC also expects the labor market to remain solid with the unemployment rate to stay near its current level at slightly above 4%, supporting demand for new single-family homes.
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CPI Inflation Meets Expectations, Up Modestly at +0.2% for July 2024 (data from 8/14/24)
PNC Senior Economist Kurt Rankin
- Topline CPI rose by 0.2% in July 2024 in seasonally-adjusted terms, slightly below PNC’s expectations
- Core CPI, less Food & Energy, gained 0.2% in July 2024, its third straight 2.0% annualized-basis result
- Food price inflation moderated for both the At Home (+1.5% annualized) and Away from Home (+2.5% annualized) categories
- Housing-related inflation snapped back from a 3-month deceleration, rising 0.4% in July 2024
Consumer Price Index (CPI) inflation came in slightly below PNC’s expectations for July 2024 for both the Topline and Core measures. Topline CPI inflation rose by 0.2% for the month, as did Core CPI. Aside from a jump in the Housing CPI index, the July 2024 CPI inflation report should be welcomed as a continuation of the downward trend toward the Fed’s inflation goal, and as support for interest rate cuts to move ahead beginning in September and continuing through the fourth quarter of the year.
Core CPI, which excludes volatile food and energy inputs and aligns with the Federal Reserve’s preferred, policy-setting metric, rose by only 0.17% in July 2024 versus the month prior. This Core metric has now posted annualized monthly gains of 2.0% or less for three (3) consecutive months. Combining the slowdown in Core CPI inflation with a slowing pace of hiring in the U.S. economy, the Fed has all of the ammunition that it needs to begin lowering interest rates throughout the remainder of this year and into 2025.
Energy prices presented less upward pressure on Topline CPI than anticipated, coming in at +0.03% for July 2024. Gasoline prices were up a similarly marginal amount for the month (+0.01%), allowing the year-over-year comparison to remain in negative territory at -2.2%. Concerns are again rising that conflict in the Middle East could broaden, which could in turn place upward pressure on oil prices. While that result would not impact the Core CPI result directly, it would be a catalyst that could generate volatility in the inflation trend later this year as the cost of shipping of goods to market would rise, and consumer prices would bear the brunt of that development.
Housing CPI jumped to a +0.4% monthly gain in July 2024 after posting three (3) consecutive months of much slower inflation through the 2nd quarter of the year. Housing accounts for more than 40% of the overall, Topline CPI index and includes necessities such as utility bills, and home maintenance needs (e.g., furniture). Recent declines in mortgage rates may well signal the potential for a reacceleration in Housing CPI entering 2025 as would-be homebuyers who have delayed purchases given the exceptional combination of stark price growth and high mortgage rates have been able to save more and could see falling mortgage rates push them over the goal line on affordability. A new round of homebuying would thereby put pressure on overall inflation from demand for big ticket goods.
Fed officials’ rhetoric has shifted markedly toward alertness toward the labor market side of their dual mandate as inflation has resumed its downward trend through the middle months of the year. The July 2024 CPI report reinforces perspectives that their shift has been appropriate, and should remove all barriers – either spoken or in action – against the Fed taking its first steps in lowering interest rates beginning at September’s FOMC meeting and following on with cuts in both November and December as well.
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PPI Inflation Saw a Welcome Slowdown in July 2024, +2.3% Year-Over-Year (Seasonally Adjusted) (data from 8/13/24)
PNC Senior Economist Kurt Rankin
- Topline PPI rose by 0.1% on a seasonally adjusted basis in July 2024
- Core PPI, less Food & Energy, fell by 0.05% in July 2024
- Services PPI fell for the first time in seven months (-0.2%); Goods PPI up sharply in July 2024 (+0.6%)
- Producers’ Energy prices rebounded in July 2024, rising by 1.9%
The Producer Price Index (PPI) was up by 0.1% on a seasonally adjusted basis in July 2024 versus June (+0.0% non-seasonally adjusted). This slowdown in producer price increases will be very much welcomed after the July 2024 jobs report sparked panic that the Fed’s battle against inflation was beginning to run at odds with its employment maximization mandate. July’s PPI result represents a 2.3% year-over-year gain, but a mere +1.2% on a monthly annualized growth basis. Goods and Services swapped roles in July, with topline PPI growth attributed to goods manufacturers’ costs while service providers saw costs recede for the month.
The PPI Final Demand for Goods category revealed that producers’ costs rose by 0.6% in July 2024. This is the sharpest gain for Goods producers since February 2024 (+1.1%). But with July being only the third month out of the past 10 to see any increase in Goods PPI, year-over-year growth in this category is still up only 1.7%. With average U.S. wage growth having outpaced topline consumer price inflation for the past year, subdued Goods PPI growth offers solid support for households to rebuild purchasing power with respect to big ticket items like vehicles and home goods. As interest rates look set to begin falling soon, households will be able to resume Goods spending – likely in early 2025 – without significant fear of demand-side inflation compounding what little supply-side price pressure there has been recently from Goods producers’ costs.
Services PPI also reversed course in July 2024. But as opposed to the jump seen for Goods producers’ costs, service providers saw a 0.2% decline in their costs for the month. This result is the first decline in Services PPI since December 2023 (-0.1%), and the largest monthly decline since March 2023 (-0.2%). Services PPI is up 2.6% versus one year ago. Given that services represent the largest share of consumer spending at nearly 68% of total Personal Consumption Expenditures, easing price pressures upstream bodes well for a continued downward trend in consumer price inflation in the months to come.
Energy PPI jumped by 1.9% July 2024 after the category enjoyed outright declines in three of the prior four months. Even with the gain in July, however, Energy PPI is up by only 0.4% year-over-year. Oil prices have seen significant volatility in recent weeks, but have managed to remain near or below $80 per barrel (West Texas Intermediate) for the most part. New concerns regarding Middle East tensions will keep energy PPI top-of-mind for inflation analysis in the weeks to come. Any oil price gains will be quickly reflected in the next few PPI reports and will make their way through to consumers with a lag, potentially offsetting enthusiasm even if consumer price inflation continues along its downward trajectory through the third quarter of this year.
Wednesday’s Consumer Price Index (CPI) report will carry more weight in the debate regarding the Fed’s pursuit of balance between their inflation target of 2% on average and an unemployment rate that is now clearly trending upward – though is still low by historical standards at 4.3%. But PPI serves as an early warning sensor as to whether any positive (i.e., weaker) CPI inflation results will face hurdles in maintaining momentum as producers look to pass their own rising costs onto consumers in the months to come. July’s PPI report relieved much of that concern for this month, leaving CPI to speak for itself for now.
