Headline Numbers Weak, But Details Mixed in Today’s Economic Data
- March Retail Sales declined by 0.3 percent, as auto sales fell.
- Ex-auto Retail Sales increased by 0.2 percent, supported by building materials.
- The Producer Price Index for Final Demand fell by 0.1 percent in March.
- Business Inventories decreased by 0.1 percent in February.
Today, bad news is good news. Total retail sales fell. Producer prices eased. Business inventories dropped, consistent with weak first quarter GDP. All three factors weigh against a near-term increase in short-term interest rates by the Federal Reserve, and so U.S. equity markets opened with gains and Treasury bond yields are up. However, this morning’s indicators are somewhat nuanced, and so we can say that the implications for the economy are not especially negative. March retail sales fell by 0.3 percent. We knew that auto sales would be a negative factor, as unit auto sales fell to a 16.6 million unit pace, taking a breather from the blistering 18 million unit pace of late last year. Two things to say…other retail sales were mostly positive, and non-retail consumer spending (services) remains healthy. The dollar value of retail auto and parts sales fell by 2.1 percent in March. However, the building materials category was up by 1.4 percent. Health and personal care store sales were up by 1.0 percent. Gasoline station sales were up by 0.9 percent. We believe that the auto component will be mixed in the months ahead, some good months and some bad, but other components will continue to grow. Total retail sales are up 2.8 percent nominally over the last 12 months. With essentially zero inflation for the consumer prices index (less shelter) over that period, the 2.8 percent nominal is close to 2.8 percent real. That is not bad. Consumer demand for services will remain strong as incomes grow and the population ages. Overall, consumer spending will continue to be a stabilizing force for the U.S. economy.
The producer price index for final demand eased by 0.1 percent in March as food and services prices dipped. Energy prices were up by 1.8 percent, reflecting the bounce back in crude oil prices, after bottoming out in early-to-mid February. We expect energy prices to gradually increase in the second half of this year, with the usual ups and downs. Going forward, energy will tend to be more of a boost to inflation than a drag. On a year-over-year basis, we expect prices indexes to continue to trend upward in the months ahead, giving the inflation hawks at the Fed something to speak about.
Business inventories dropped by 0.1 percent in March, confirming another weight on the expected weak first quarter GDP report, due out on April 28. The headline numbers are masking two effects. One is oil. We know that crude oil and petroleum product inventories are swollen and are expected to gradually decline as the oversupplied oil market tightens up over the next year or so. The other issue is auto inventories, up a strong 9.3 percent over the last year. If sales do not pick up following the March dip, we may see some production adjustments among auto producers. This could increase downward pressure on manufacturing employment.
Market Reaction: Equity markets opened with gains. The 10-year Treasury yield is up to 1.78 percent. NYMEX crude oil is down to $42.12/barrel. Natural gas futures are up to $2.01/mmbtu.
For a PDF version of this Comerica Economic Alert click here: Retail Sales 04-13-16.