July Retail Sales, Producer Prices, June Business Inventories

Consumers Perk Up After 3-Month Snooze, Energy Prices Skewed Data

• July Retail Sales increased by 0.8 percent, reversing a three-month decline.
• Ex-auto Retail Sales also increased by 0.8 percent with gains in all major categories.
• The Producer Price Index for July increased by 0.3 percent, the largest monthly gain since January.
• Business inventories for June increased nominally by 0.1 percent.

U.S. retail sales increased by a better-than-expected 0.8 percent in July, reversing a three-month decline from April through June.  The July sales gain was the largest monthly increase since February. The weak stretch for retail sales through the second quarter was causing consternation as a possible recession indicator, but the July reversal in sales plus the role of energy prices in the Q2 sales slump lowers the reliability of that indicator. The Q2 slide in retail sales was exacerbated by declining gasoline prices, which depressed service station sales as the U.S. average (non-seasonally adjusted) price for regular unleaded gasoline fell from $3.87/gallon in April to $3.52 in June, a decline of nine percent. All major retail sales categories were up in July, indicating a broad-based loosening of the purse strings, as shoppers spent out some of the pent-up demand of the previous three months. Gasoline station sales were up 0.5 percent in July as gasoline prices firmed up. Further increases to retail gasoline prices through mid-August will boost retail sales for the current month.  The continuation of moderate job growth in August may be another positive for retail sales. July payroll jobs increased by 163,000 jobs well above the May-June average of 73,000 jobs per month.

Producer prices for July also reflect the impact of energy prices, but in the opposite direction. Gasoline prices fell at the wholesale level for the fifth consecutive month in July. The producer price index for finished goods increased by 0.3 percent, while the energy component fell by 0.4 percent. Wholesale food prices contributed to the July gain in the headline PPI, as they rose 0.5 percent, the same increase as June.  Beef, veal and pork prices were up noticeably as livestock feed prices reflected the failing corn crop. Excluding food and energy, the core PPI for finished goods was up 0.4 percent as light truck, pharmaceutical and cigarette prices lit up. Total business inventories for June increased by 0.1 percent. Inventory accumulation was responsible for the relatively strong 4.1 percent annualized growth rate for real GDP in 2011Q4, but is not expected to spur a similar gain in the upcoming 2012Q4.

Market Reaction: Equity markets opened with gains. Treasury yields are up at the long end of the yield curve. NYMEX crude oil is up to $93.36/barrel. The dollar is up against the yen and the euro.