June Retail Sales marks the second-consecutive month of poor data. Headline Retail Sales fell 0.2% versus a prior revised -0.1% (up from -0.3%). The Retail Sales Control Group (Ex food, energy and building materials), which is used in the GDP calculation, was down 0.1% after printing at 0.0%, in May. Softness in the retail sales data was broadly-based. From autos to fuel to restaurants, retail sales declined.
The catch-all “Miscellaneous” category was down a troubling 3.1%, month-over-month. This follows a decline of 0.7%. It was as recently as January of this year that “Miscellaneous” sales increased 1.0%. Although the sales data was troubling from a units sold perspective, much of the weakness in the data was due more to fewer dollars spent rather than fewer units sold (Retail Sales are measured in dollars spent). This is consistent with soft CPI numbers.
June CPI data indicate that the headline inflation rate fell to 1.6% from a prior 1.9%, year-over-year. The street was expecting a more moderate decline to 1.7%. Core Annual CPI held steady at an unintimidating 1.7%. As with Retail Sales data, soft inflation conditions were broadly based. The CPI for new vehicles fell 0.3%; air fares declined 2.7%.
Shelter costs increased 0.2 %, with a 0.3% increase in owners-equivalent rent, one of the categories designed to track rental prices, but the price of lodging away from home dropped 1.9%. Energy prices fell 1.6%, month-over-month. Food prices were essentially unchanged. New vehicle prices new vehicles fell 0.3%, MoM while air fares declined 2.7%, MoM. The cost of medical care increased 0.4 % MoM. This was the most since August 2016. Transportation was down 0.6% on a monthly basis and apparel prices fell 0.1%, on the month.
Is inflation temporary?
In recent statements, Fed Chair Yellen opined that the softer inflation pressures, seen during the past several months, were temporary/transitory and due mainly to falling cell phone services prices. I have pointed out that it is falling energy prices that are having a more significant impact on inflation reads (both directly and indirectly) than cell phones. A comparison of year-over-year data indicate that we could get an upward boost to annual headline CPI in July and August, but unless OPEC returns to pricing dominance (very unlikely, in my opinion), soft inflation data should return by September.
Technology, such as internet sales, has, in my opinion, created a new inflation paradigm. Both retailers and wholesalers can compete for business with much less regard to geography than in the past. Thus, there is a war going on for consumers’ dollars. This helps to hold down prices. As businesses have little purchasing power, it limits the wage gains that can be offered by businesses. This helps to feed low inflation as well by limiting the number of dollars with which consumers can spend. Around and around we go. This is known as a negative feedback loop.
However, workers are experiencing real wage gains (wage gains adjusted for inflation). The data indicate the real wages rose 1.1%, in June. This was up from 0.5%, in May. Much of this was due to falling consumer prices. If medical care prices continue to outstrip other measures of inflation, real wage gains could end up paying for medical care rather than for discretionary goods and services which tend to drive economic growth.
Taking an honest look at technology, demographics and globalization, it appears that we are in a new era of low inflation and moderate economic growth. As such, I suspect central banks will be careful to not permit their currencies to strengthen too much. With the USD weakening on soft inflation data (assuming that soft inflation will moderate the pace and magnitude of monetary policy renormalization), I expect the ECB to walk back hawkish rhetoric and delay renormalization. Draghi cannot allow the euro to strengthen much more or he risks undoing the progress he has in the areas of inflation and economic growth.
Industry and growth
Industrial Production and Capacity Utilization numbers were mixed. Industrial Production increased to 0.4% versus a prior 0.1%. This was better than the Street consensus estimate of 0.3%. Capacity Utilization rose to 76.6% from 76.4%, but missed Street expectations of 76.8%. In my opinion, true Capacity Utilization is much better because I believe much of the capacity viewed as surplus is, in fact, superfluous and will never be used again. As such, it should be removed from the equation.
Following last Friday’s soft economic data, the Atlanta Fed lowered its GDPNow forecast for second-quarter GDP to 2.4% from 2.6%. Thus, if the Atlanta Fed is proved correct, U.S. GDP for the first-half of 2017 will average 1.9%. The New York Fed’s Nowcast Q2 GDP forecast currently stands at 1.9%. If the New York Fed is proved correct, first-half 2017 U.S. GDP would average 1.65%
If recent trends hold true, Q2 GDP will probably print somewhere between the Atlanta Fed and New York Fed estimates. As such, the U.S. economy may not average even 2.0%, in the first-half of 2017. This means that even with a home run in the area of fiscal policy (becoming less likely, every day), a 3.0% U.S. economic growth rate looks increasingly unlikely.