US Retail Sales July Preview: Expectations of moderation may be overstated

• Sales recovery expected to moderate in July from historic gains in May and June.
• Non-farm payrolls expansion in July stronger than anticipated.
• Initial jobless claims drop 19% in the latest week.
• Consumer inflation accelerated in July suggesting stronger demand.
• Industrial production predicted to rise 3% in July.
• Dollar likely to receive a boost if sales beat expectations.

The American consumer has spent almost double what analysts expected in the last two months. Chances are that record will continue in July despite forecasts for a sharp drop in retail sales.  

Better than expected payroll expansion in July, a steep decline in unemployment claims and rising inflation all suggest an unimpaired US consumer.

Retail sales are forecast to rise 1.9% in July following the combined 25.7% gain in June (7.5%) and May (18.2%). Those months more than recovered the 22.9% lockdown collapse in March and April. The combined forecasts for May and June were 13%, just over the half the actual increase.

Purchases in the control group category which is the Bureau of Economic Analysis’ consumption component, are forecast to rise 0.8% in July after June’s 5.6% and May’s 10.1% increases. Purchases dropped 12.4% in April 12.4% and rose 3.2% in March.

Sales excluding automobiles are projected to climb 1.3% in July following gains of 7.3% in June, 12.1% in May and losses of 15.3% in April and 3.8% in March.

Initial jobless claims and non-farm payrolls

The 10% jump in initial jobless claims from 1.307 million in the week of July 10 to 1.435 million on July 24 raised many concerns that the second wave of Covid cases in a number of states, particularly the large economies of California, Texas and Florida, was impairing or halting the recovery from the widespread pandemic closures in March and April.   

Initial jobless claims

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The higher rate of unemployment claims had been expected to continue in the final week of the month at 1.415 million.  Instead claims fell 17% to 1.191 million on July 31. Claims were projected to fall to 1.120 in the Aug 7 week. They dropped 19.1% to 0.963 million, their lowest level of the Covid era.

Non-farm payrolls had been forecast to drop by two-thirds in July from 4.8 million to 1.6 million.  The largest factor in the decline being the expected impact of the spreading second wave of Covid diagnosis.  Here too the effect of the rollbacks of opening measures in several states was overstated, payrolls added 1.763 million workers 10% more than expected.

It appears that the mid-July rise in jobless claims was restricted in time and amount.  Claims have dropped 32.9% in two reports, from 1.435 million the July 24 week, to 0.963 million on August 7.  

Payrolls were likewise less affected by the new incidence of Covid cases than anticipated.  Of the 22.16 million workers who lost their jobs in March and April, 42% 9.253 million have been rehired.

CPI and consumer sentiment

Consumer price increases in July doubled forecasts.  Overall CPI rose 0.6%, as it did in June, twice as much as the 0.3% forecast.

CPI

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Core inflation was also 0.6% higher on the month, three times its June rate and the July estimate.

The annual rates have not yet fully recovered from the shutdown plunge in demand. The headline rate is expected to be 1% in July, less than half its February rate of 2.3%. The core yearly rate is forecast to be 1.6% in July, two-thirds of its February rate.

Higher consumer inflation in July implies steady or rising demand which means retail sales are unlikely to have fallen far from their June increase of 7.3%.

Consumer sentiment fell in July.  The Michigan survey of sentiment dropped from 78.1 in June to 72.5 in July and is expected to slip to 72 in August. 

Industrial production

Industrial production has been a laggard in the recovery. After plummeting 4.6% in March and 12.5% in April, May returned just 1.4% and June 5.4% leaving a 10.1% shutdown deficit.  The formulation of the 3% July forecast was likely affected by the economic slowdown that was presumed early in the month when the survey was taken. 

The GDPNow estimate for the third quarter from the Atlanta Fed has moved steadily higher from its first reading of 11.9% on July 31 to 20.5% on August 7.  The next iteration is after retail sales on August 14.

Conclusion and the dollar

Non-farm payrolls and the late month improvement in jobless claims suggest that the labor markets continued to be productive of rehiring in July.  The jump in inflation implies steady or rising consumer demand. 

Employment is the most important factor in consumption.  If US households are reasonably confident of maintaining their income they have always been reliable consumers.  The only caveat to this consumption picture is the drop in consumer sentiment in July.  It is possible that, given the actual job and inflation numbers, the decline was more a product of the fear of the second wave cases than a measure of genuine economic impact. 

The sell-off in the US dollar over the past month was predicated on the second wave Covid impact on the economy.  If retail sales do not in fact drop as anticipated, the currency will have another data point for a stronger USD.