Strong Consumer Spending Supported Q2 GDP
- June Retail Sales increased by 0.6 percent, adding to expectations for a rebound in Q2 GDP growth.
- The Consumer price Index for June gained 0.2 percent, as energy prices increased.
- Industrial Production increased by 0.6 percent in June, as utility output warmed up.
Retail sales beat expectations, increasing by a strong 0.6 percent in June. This supports our view that the second quarter GDP numbers (advance estimate due out July 29) will show a significant pickup in growth after a mediocre 1.1 percent real GDP gain in the first quarter. The rebound in payroll job growth in June, combined with strong retail sales for the month, suggests that the concern about a sustained rapid cool down in job creation in May was overdone. Ongoing strong job growth, increasing wages and meaningful gains in homeowner equity are all supportive of retail sales. Apparently, any drag on consumer sentiment resulting from the BREXIT vote and associated financial market volatility happened late enough in the month to avoid weighing on June retail sales. If job growth and the stock market rally so far through July are sustained, then we expect BREXIT to be a non-issue for American shoppers going forward. Retail sales ex-autos were up 0.7 percent in June supported by a strong 3.9 percent increase in building materials sales. Most other sales categories were positive for the month. Gasoline station sales were up by 1.2 percent, buoyed by higher prices. Retail sales of autos and parts were up barely, gaining 0.1 percent in June even as unit auto sales eased from a 17.5 million unit pace in May to 16.7 million in June.
The consumer price index for June was up by 0.2 percent, just below consensus expectations. Over the previous 12 months, the CPI was up by just 1.0 percent, reflecting the drag from lower energy prices through early this year. The headline index in June was supported by energy prices, which increased by 1.3 percent, paced by higher gasoline prices. According to AAA, today’s national average price for regular gasoline is $2.20 per gallon, down from $2.37 a month ago. This implies that energy will be a slight drag on the CPI in July. Core CPI (all items less food and energy) also increased by 0.2 percent in June, and was up by 2.3 percent from a year ago. Medical and housing continue to drive core CPI growth. Over the 12 months ending in June, the shelter price index was up 3.5 percent and the medical care services sub-index was up by 3.8 percent.
Industrial production also did better than expected in June, up 0.6 percent. Manufacturing output gained 0.4 percent. Despite cooler auto sales, motor vehicle assemblies were up by 9.6 percent. Auto and light truck assemblies reached their third highest rate in this cycle, hitting a 12.18 million unit annual rate. Strong production and softer sales is not a positive combination for the auto industry. It may take Detroit a few more months to ease production if sales remain below the late 2015 peak. This raises the possibility of at least a small inventory correction looming for the U.S. auto industry. It is still early to call for that, but it is worth watching.
Market Reaction: Equity markets opened with gains. The 10-year Treasury yield is up to 1.58 percent. NYMEX crude oil is up to $45.92/barrel. Natural gas futures are down to $2.67/mmbtu.
For a PDF version of this Comerica Economic Alert click here: Retail Sales 07-15-16.