More Signs of a Soft Patch
Several economic reports released today provide additional evidence that the economy appears to be heading into a soft patch. First-quarter real GDP posted a meek 1.4 percent gain, held back by sharply lower auto sales. Data so far for the second quarter show continuing weakness in autos and housing. Softer GDP, housing and autos emerged despite the strong performance of the labor market. Declining consumer confidence, especially about the future, coincides with the softening spending.
Retail sales and food-services spending for June fell 0.2 percent, following a 0.1 percent decline in May. Gasoline spending dropped 1.3 percent for the month, driven largely by a 1.7 percent drop in average retail gas prices. Excluding gasoline spending, retail sales and food-services spending fell 0.1 percent after a 0.2 percent gain in May. Motor vehicle spending posted a 0.1 percent increase despite a 1.0 percent fall in unit sales. Core retail sales, which exclude motor vehicles and gas, fell 0.1 percent for the month and are up 2.6 percent from a year ago.
Discretionary retail sales, as calculated by AIER, fell 0.1 percent for the month and are up 2.8 percent from a year ago. The only discretionary category to post a significant gain in June was that of building materials, garden equipment, and garden supplies, rising 0.5 percent for the month. Spending on staples fell 0.6 percent. When gasoline is excluded, staples spending posted a 0.2 percent decline. The only category among the staples to post a gain was health and personal-care stores, which rose 0.3 percent for the month.
Overall, the retail-spending data show consumers are taking a bit of a breather, though the pace of growth for the retail-spending parts of GDP may actually have been slightly stronger in the second quarter compared to the first. Regardless, real GDP growth in the second quarter is looking to be modest by historical standards.
The slowdown in consumer spending has coincided with a fall in consumer sentiment, especially regarding the future. Early July results from the University of Michigan Survey of Consumers show the overall sentiment index fell to 93.1 from 95.1 in June. Subindexes went in opposite directions, as the index for current economic conditions rose to 113.2 from 112.5, a 0.6 percent gain, while the index of consumer expectations fell to 80.2 from 83.9 in June, a drop of 4.4 percent. The index of consumer expectations tends to be more predictive and is one of the indicators in the AIER Leaders index. It has given back all of the surge that took place after the presidential election. That suggests consumers may be getting discouraged by the lack of progress and the heavy partisanship coming out of D.C., which may be impacting spending decisions.
Finally, the Bureau of Labor Statistics released the Consumer Price Index for June today. The CPI was unchanged from May and is now up 1.6 percent from a year ago, significantly below the 2.8 percent gain in February. The core CPI, which excludes food and energy prices, rose 0.1 percent in June and is up 1.7 percent from a year ago. That is down from a 2.3 percent rise in January.
The broadening nature of the deceleration in economic activity, consumer price increases, and consumer sentiment are a concern. However, the economy has been through these soft patches before. It’s way too early to talk about the possibility of recession, especially with the labor market so strong. Still, prudence dictates close monitoring of economic indicators in the weeks and months ahead.
Robert Hughes
Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.
