August 15, 2019 Reading Time: 3 minutes

Retail sales and food-services spending rose 0.7 percent in July following a 0.3 percent gain in June. Excluding the volatile auto and energy categories, core retail sales and food services were up 0.9 percent in July after a gain of 0.6 percent in June. Both categories have risen for five consecutive months. Over the past year (through July), total retail sales and food services were up 3.4 percent while core retail sales and food services have increased 4.2 percent (see top chart). The strong start to the third quarter follows an initial estimate of 4.3 percent growth in real personal consumption expenditures for second-quarter gross domestic product.

Strength in July was widespread, with gains in 10 retail-spending categories, while 3 categories posted declines. Gains were led by a 2.8 percent rise for nonstore retailers (primarily online shopping) and a 1.1 percent increase for restaurants. Gas station sales were up 1.8 percent, though volatility in gasoline spending tends to reflect changes in prices rather than changes in volume.

Sporting-goods, hobby, musical-instrument, and book stores led the decliners with a 1.1 percent drop, followed by a 0.6 percent retreat for motor vehicle and motor vehicle–parts dealers. The drop in motor vehicles was not surprising given the slower pace of unit sales, coming in at a 16.8 million-unit annual pace versus a 17.1 million rate in June.

Industrial production fell 0.2 percent in July, following a 0.2 percent gain in June. The July fall is the third drop in six months. Over the past year, industrial production is up just 0.5 percent. Total capacity utilization decreased 0.3 percentage points to 77.5 percent as capacity posted a 0.2 percent gain for the month.

Manufacturing output, which accounts for about 75 percent of total industrial production, fell 0.4 percent after rising 0.6 percent in June. Manufacturing output has been down for five of the past seven months, resulting in a 0.5 percent drop over the past year (see bottom chart).

Mining output posted a 1.8 percent drop for the month while utilities output jumped 3.1 percent. Over the past year, mining output is up 5.5 percent while utilities output is up 0.3 percent.

Manufacturing-sector weakness was widespread, with durable-goods manufacturing down 0.2 percent and nondurable-goods output off 0.5 percent. Most industries within both categories declined last month.

Measured by market segment, consumer-goods production was up 0.2 percent in July, with consumer durables up 0.3 percent and consumer nondurables up 0.2 percent. However, business-equipment production fell 0.4 percent in July while construction supplies decreased 1.0 percent for the month and business-supplies production fell 0.4 percent.

Materials production (about 46 percent of output) decreased 0.3 percent for the month and is up just 0.6 percent from a year ago. The energy component has been a major source of volatility in this category, particularly following the collapse of energy prices in mid-2014. The non-energy component fell 0.4 percent for the month and is down 1.5 percent from a year ago.

Manufacturing-capacity utilization dropped to 75.4 percent in July, down 0.4 percentage points from 75.8 percent in June.

The data for July suggest consumer spending remains solid, supported by the strong labor market, rising incomes, and relatively favorable consumer sentiment. However, there are emerging signs that some businesses may be getting more cautious. Companies and businesses exposed to the global economy and erratic trade policy may be most at risk. The most recent survey from the National Federation of Independent Businesses, a small-business industry group, suggests small businesses remain strong and optimistic. On balance, the most likely path is continued economic expansion, but caution is warranted.

Robert Hughes

Bob 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.

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