Consumer Caution was Evident in the July Retail Sales Report

By | August 17, 2020

Welcome to FTR’s “Monday Morning Coffee “ blog. The following article is designed to keep busy executives up to date with the latest economic data releases. Released every Monday, this blog promises to keep our clientele updated with the latest weekly economic news and developments, highlighting its impact on the transportation, freight, and equipment markets. Hopefully, this will be an informative addition to the fine body of work associated with FTR.


Global shares dipped on Friday after lackluster Chinese economic data and worries about further delays in U.S. fiscal stimulus discouraged investors from taking on risk. European shares dipped after added more European countries to its quarantine list. The pan-European STOXX 600 was down 0.7%, although on track for a positive gain for a second straight week. MSCI’S world index was down 0.2%, drifting lower from the peak last February. The index was still up 50% from its low point in March. Chinese share rose 1.5% on choppy trading, with data suggesting domestic demand is still struggling after the coronavirus outbreak. Further equity gains are limited as investors wait for progress in negotiations over U.S. economic stimulus.

Stocks fell on Friday as data out of China, the euro zone and the United States put a lid on expectations for a sustained global rebound. Traders were already worried about a delay in U.S. stimulus. A review of the U.S./-China trade deal was initially slated for Saturday but will be delayed and no date was agreed on. In the U.S., retail sales slowed down but were higher than the pandemic peak. The Dow Jones Industrial Average rose 34.3 points, or 0.13% to 27,931.02. The S&P lost 0.58 points, or 0.21% to 11,019.30. MSCI’s world index shed 0.25%, drifting further from the high reached in February. The euro zone recorded a record drop in employment and GDP in the second quarter, but production did rebound in June.

Weekly initial claims are signaling further improvement in the labor market. Seasonally adjusted initial claims decreased by 228,000 to 963,000 in the week ending August 8. Non-seasonal adjusted declined by 156,453, to 831,000, the second straight reading below 1 million since the pandemic began. Filings for Pandemic Assistance declined from 655,999 to 488,622. Continuing claims fell from 16.09 million in the week ending July 25 to 15.49 million. The insured unemployment rate fell from 11.0% to 10.6%. After weeks of moving sideways, the last two week’s numbers were a pleasant surprise. The outlook for the labor market remains mixed. Although cases of coronavirus cases have plateaued in many places, the number is still higher in the early stages of the pandemic. The economy still needs another round of stimulus and states need to safely pursue re-opening.

Consumer prices jumped 0.6% in July. The increase reflects the unwinding of the pandemic induced price cuts this spring rather than a sustained pickup in inflation. Consumer caution was evident in the July retail sales report, which showed an advance of just 1.2% after surging in May and June. With the extra unemployment benefits fading and weaker employment gains, the outlook for spending may be rough. There may still be another stimulus bill. If not spending should remain positive but could be restrained. Industrial production increased 3.0% in July, aided by a 3.4% pickup in manufacturing. Motor vehicles and parts output surged 28.3% and business equipment output was up a solid 5.0%. The road ahead for the industrial sector will not be easy as the global economy is weak and tensions with China are growing. However, we should see positive progress going forward.

Next week, we get a look at housing starts and permits and existing home sales.

Latest Data

The U.S. Economy:

Producer prices increased 0.6% in July after a 0.2% decline in June. Goods PPI advanced 0.8% in July, while service prices increased 0.5%. The increase n goods prices can be largely attributed to diesel prices, which jumped 31.3%. The PPI for final demand excluding food and energy, increased 0.3% following a 0.1% advance in June. Deflationary prices are easing, but a slowdown in the economy could reverse the process. Energy prices have advanced but remain below pre-pandemic levels. Consumer prices also increased 0.6% in July, largely driven by energy prices, which rose 2.5%. Food prices fell 0.4% for the month. The core CPI rose 0.6%, as apparel, used car prices and transportation posted solid gains. Despite an increase in inflationary pressures over the last couple of months, we view it as just a temporary rebound from very low levels. Final demand will only strengthen slowly, at best and not be hot enough to generate strong inflationary pressures.

The NFIB small business optimism index took a step backwards in July, falling 1.8 points to 98.8. Of the indexes 10 components, one was unchanged from June, while five declined ad four improved. Expectations for the economy declined to 25% from 39% in June. This was the lowest reading since the onset of the pandemic in March. Expectations for real sales also declined in July, dipping to 5% from 13% in June. The net percentage of small businesses planning to increase employment moved up from 16% in June to 18% in July, close to February’s reading of 21%. The net percentage of small businesses planning on making capital investments over the next six months increased from 22% to 26% in July. This component has been steady since April. The increase of COVID-19 infections in July likely dulled expectations for a quick recovery. The growing uncertainty could stifle the economy’s recovery. Failure of Congress to come to an agreement on a second stimulus package is not helping confidence of both businesses and consumers.

Rising energy prices are boosting import prices, which jumped 0.7% in July. Imported fuels and lubricants prices climbed 6.9% after a hefty 21.9% gain in June. Nonfuel import prices increased 0.2% in July, after a 0.3% gain in June. Since the increase in prices is tied to fuel, it is doubtful the Fed will change its forward guidance. 

Retail sales continued to rise in July, although the pace continued to slow as the level of sales surpassed its pre-pandemic levels. Retail sales grew 1.2% in July, after soaring 8.4% in June and 18.3% in May. Sales were 2.7% above their year ago levels and 1.7% above February’s level. Motor vehicle and parts sales slipped 1.2%, following a 9.1% surge in June. Vehicle unit sales rose in July. Gasoline station sales rose 6.2% on higher prices. Sales excluding gas and autos were up 1.5%. Growth was led by the electronics and appliance stores, which saw sales grow 23%. Growth was 5% or better at miscellaneous store retailers, apparel stores and restaurants. Sales declined at sporting goods, building supply and general merchandise stores. Despite the increase in sales, the outlook is still murky. Employment growth is still good but is slowing and the lack of a stimulus package could have big consumer repercussions. However, virus outbreaks are slowing spending in affected areas.

U.S. factory conditions have improved over the past few months as states reopened their economies after many shut them down to contain COVID-19. Industrial production rose 3% in July. , following a 5.7% surge in June. Manufacturing rose 3.4% in July, largely driven by a 28.3% increase in output from the auto sector. Manufacturing excluding the auto sector was up 1.6%. Business equipment production was up 5% in July, following a 11.7% increase in June. Defense and space production gained 2.5%, the third consecutive increase. Construction supply advanced 0.4% in July. Utility production increased 3.3% in July after a 2% rise in June. Mining production was up 0.8% in July, breaking a two-month losing streak. Industrial production is advancing but remains below its pre-COVID-19 level. There was an initial bounce after shutdowns were lifted, but the next phase could be a bigger struggle, as new coronavirus infections are forcing some states to renew some restrictions. Auto production has bounced back, but sales are still not near pre-pandemic peaks. Tensions between the U.S. and China have increased. The global economy is rebounding, but slowly. All this suggests some bumps in the road ahead for the industrial sector.

Business inventories declined again in June, but less than expected. Stocks fell by 1.1% in June, following a 2.3% decline in May. Among categories, manufacturing inventories grew 0.6%, while retail stocks contracted 2.7% and wholesale fell 1.4%. Business sales continue to recover. Wholesale sales increased 8.8%, manufacturing sales rose 9.8% and retail sales increased 6.8%. The inventory-to-sales ratio fell back to 1.37, the lowest since January. The economic recovery continues to surprise on the upside. Inventories declined for another month and demand is rebounding and the sales ratio is back in a normal range. This suggests some extra production as long as final demand holds up.


China’s retail sales slipped in July, as consumers remain wary after the coronavirus outbreak. Retail sales dropped 1.1% on year, dashing expectations for a 0.1% rise. The decline in sales was broad based, with garments, cosmetics, home appliances and furniture all reporting losses. A key exception was auto sales, which surged 12.3%, turning around from an 8.2% decline in June. Meantime, industrial output grew 4.8% in July from a year earlier, in line with June’s growth but less than the 5.1% forecast. Some analysts attributed the loss of momentum to the torrential rains that have it the southern part of the country since June. Rising tensions with the U.S. are a problem in that country.

Important Data Releases This Week

The July housing starts report will be released on Tuesday, August 18 at 830 AM. Housing starts picked up steam in June, rising 17.3% to an annualized pace of 1.186 million. We expect a further improvement in July but not at the same robust jump in June. Starts are projected to hit a 1.230 million pace.

The July existing home sales report will be released on Friday, August 121 at 10:00 AM. COVID-19 pushed the spring selling pace back but homebuyers are appear poised to make up for lost time. Existing home sales jumped 20.7% in June to a 4.72 million pace. Sales are projected to hit a 5.4 million annualized pace in July.

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About Steve Graham

Steve is one of the premier analysts in the transportation equipment industry. On a monthly basis Steve tracks and analyzes in detail the trailer and heavy-duty truck industry. Aside from following these two sectors he is also instrumental in helping our customers analyze the economy and its impact on transportation and transportation equipment.