Signs of Weakness in Q3 Consumer Spending Already Visible
Tax rebate dollars helped to lift consumer spending in May, which translated into a 1.5% annualized increase in inflation adjusted consumer spending during the second quarter. However, in June, inflation adjusted consumer spending fell 0.2%. Retail sales fell 0.1% in July, after a revised 0.3% gain in June. The July retail sales report points to a strong likelihood of another monthly decline in inflation adjusted consumer spending.
Auto sales dropped 2.4% in July, accounting for a large part of the weakness in retail sales during July. Sales of furniture (+1.0%), apparel (+0.2%), building materials (+0.3%), and general merchandise (+0.3%) advanced in June. With the exception of general merchandise, the other components posted declines in June. Retail sales excluding autos, gasoline, and building materials moved up 0.3% in July, the smallest increase since February.
Inventories Climb, But I-S Ratio Maintains Declining Trend
Business inventories moved 0.7% in June, after a 0.4% increase in May. Total business sales increased 1.7% in June, resulting in a 1.23 inventory-sales (I-S) ratio vs. 1.24 in May. The declining trend of the I-S ratio suggests that the absence of a large buildup in inventories as business conditions weaken will effectively help to avoid a deep contraction in real GDP.
Looking at the different stages of trade, retail and wholesale I-S ratios maintain a noticeable declining trend.
But, the factory sector has a less positive story to tell. The factory I-S ratio at 1.22 in June is down from 1.26 in March, but the underlying trend is markedly different from that of the retail and wholesale sectors.
Import Prices Continue to Advance, Relief Soon?
The Import Price Index rose 1.7% in July, reflecting the sharp increase in imported petroleum (+4.0%) and a 0.9% gain in non-petroleum imports. The price index of imports excluding fuel rose 0.7%, putting the year-to-year increase at 6.9%. The upward trend of both indexes is bothersome as they will translate into higher consumer prices.
Rising energy prices and a weak dollar were responsible for the upward trend in import prices. The recent drop in energy prices and the rally of the dollar are factors, in addition to weakening demand for imports, that should help to trim the gain in import prices in the months ahead.
