What May Retail Data Means for the Fed
The Census Bureau released its data for May retail sales and the results are even worse than they seem.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
Early Tuesday morning, the Census Bureau released its data for May retail sales. Just as an FYI, for future reference, this series is not adjusted for inflation. Consumer-level inflation was not exceptionally hot in May anyway, but enough folks don't know that, so I think it's worthy of a mention. Retail Sales were a bit weak in May.
At the headline, May retail sales printed at month-over-month growth of 0.1%, well below expectations for growth of 0.3%. It's worse than it sounds too, because April retail sales were revised to -0.2% month over month from the original print flat (0.0%) from March. That means that the growth of 0.1% was off of a lower base than had been the expectation for 0.3%.
The story does not improve at the core, which excludes autos and auto parts. Core retail sales for May printed at -0.1% from April, which was again well below expectations for growth of 0.2%. April core retail sales were revised from the original print of +0.2% month over month to -0.1%, again making May in reality worse than it looks as the expectation here had also been set coming off of a higher base. For those who may have just noticed, yes, core retail sales have now contracted for two consecutive months.
The Highlights (and Lowlights)
Among the most depressed groups were gasoline station sales that were down 2.2% from April, furniture sales that were down 1.1% from April and sales of building materials that were down 0.8% from April. Apparel sales were strong at +0.9% on top of an exceptional April (+1.7%), which is impressive given that apparel sales are only up 2.4% year over year now, after these two "hot" months.
I was also impressed by strength in what I call the "fun index," which is the line item labeled sporting goods, hobbies, music and book. Basically, this item is all discretionary spending as it contains items that for most people are purely discretionary in nature. You don't buy this stuff if your kids are hungry. This group printed at -2.4% for April from March, so it's really just about even over the past two months, but it still perplexes.
There is no doubt that over the past two months, consumers have slowed their appetite, or perhaps their appetite has been slowed for them by unfortunate circumstances such as slightly higher unemployment, significantly higher underemployment and stagnant real wages.
Market Reaction
Weaker retail sales are obviously bad news for the economy, but perhaps good news for those hoping for the Fed to move on a short-term rate cut any time soon. This market phenomenon was apparent in the market for U.S. treasury debt securities right away this morning. The U.S. ten-year note yielded as much as 4.3% ahead of this morning's data. I see that product paying a rough 4.23% as I write this piece. The yield for the U.S. two-year note has gone from a high of 4.79% early this morning to 4.71% early this afternoon. The action has also permitted equity markets, on quiet holiday trading volume, to at least hang on to Monday's quite robust broad market gains.
Industrial Production
About 45 minutes after May retail sales had been released, May industrial production hit the tape, courtesy of the Federal Reserve. This item kind of saved the day from an economics perspective. Industrial production in May grew 0.9% from an unrevised flat print in April. In fact, May was the strongest month for industrial production in the U.S. since may of 2022. That's two years.
Within the print, manufacturing production also popped for growth of 0.9% month over month after two months of contraction. Mining Ppoduction also showed growth (0.3% after two months of contraction). Utilities production has been the beast of this print for two months now, growing 1.6% in May from April after having grown 4.1% in April from March.
Capacity utilization improved across the board in May, which was very nice. At the headline, capacity utilization hit the tape at 78.7%, up from 78.2% in April. For those who don't snack on statistics for the fun of it, that's one heck of a one-month move for this series. Within that number, manufacturing capacity utilization grew to 771%, mining capacity utilization grew to 92.7%, and utilities capacity utilization grew to 71.5%. I would love to see electricity broken out in isolation. If someone knows where to find that, given the rise of EVs, AI and cryptocurrency mining, I would love to know how much capacity there has been left on the table.
The Bottom Line
OK gang, on Tuesday morning we saw a weak print for May retail sales followed by a strong print for May industrial production. This may seem like a reversal of what has kept us out of recession to this point, but this is indeed how soft landings are built... through rolling recessions where the nadir of activity is shallower than if everything slowed at once. Let's hope manufacturing and utilities can continue to pick us up as a nation if the consumer is going to be down for a while. The bond market is obviously choosing to prioritize retail sales over industrial production.
The Atlanta Fed's GDPNow model seemed like a deer in the headlights a short while ago and left its estimate for Q2 GDP at growth of 3.1% (quarter over quarter, SAAR). Not that they did nothing. Atlanta did tweak lower its input for real personal expenditures but increased its inputs for real gross private domestic investment and real government spending, while also increasing the input for real net exports.
Remember, of the four regional Fed districts that model GDP in anything close to real-time, Atlanta is the most optimistic by far. For the second quarter, New York is at growth of 1.91%, St. Louis is at growth of 0.94% and Cleveland is at growth of 0.67%. These three all revise their models on weekends. Atlanta will again revise its model this Thursday after the May housing starts print. Readers should also know that Atlanta, New York and St. Louis all use incoming data to feed their models. Cleveland's model is based on the slope of the yield curve.
Fed Funds Futures
As of the time of this writing, futures trading in Chicago were pricing in a 92% chance for no change in short-term rates on July 31, 2024, but a 67% likelihood for a 25-basis point rate cut on September 18, 2024. You know how I feel about a rate cut that close to the election, but this is what the futures markets are trying to tell us.
These markets are also pricing in an 80% probability for a 25-basis point rate cut by November 7, 2024, and a 68% likelihood for 50 basis points' worth of rate cuts by year's end. I think that's quite possible if the consumer really is in trouble and if the unemployment rate moves above 4%.
At the time of publication, Guilfoyle had no positions in any securities mentioned.
