Mixed Signs From The Economy As Sales Climb, Industrial Output Declines
The economy offered some mixed signals as retail sales rose for the fifth straight month in July. Industrial output declined during the month, however, weighed down by continued weakness in the manufacturing sector
The Census Bureau reported that total retail sales rose 0.7 percent in July from June's levels after a downwardly revised 0.3 percent increase in the previous month. This beat consensus estimates of a 0.3 percent gain and marks the fifth consecutive monthly increase in the retail sector. Year-over-year growth in total retail sales rose to 3.4 percent in July, up from 3.3 percent in the previous month.
The retail sector continues to enjoy broad-based strength at the industry level, as sales in 10 of the 13 major industries saw higher sales in July. Nonstore (mostly online) retailers continued their tear during the month, rising by an impressive 2.8 percent as year-over-year growth climbed to an 18 ½-year high of 16.0 percent. Sporting goods, healthcare and motor vehicle retailers were the only industries with falling sales in July. Core retail sales, which exclude auto and gasoline purchases, rose by an impressive 0.9 percent in July with year-over-year growth rising to the highest point this year at 4.2 percent.
Core sales growth accelerated above 4 percent in July
Retail continues to be a consistent source of strength in the freight economy, particularly as it relates to trucking and parcel demand. Most of the goods movements between warehouses and retail locations occurs by either truckload, less-than-truckload or parcel shipments.The retail sector enjoyed one of the strongest quarters in the post-recession era in the second quarter, and has continued this performance so far in the third quarter. The recent stock market turmoil carries some implications for consumer confidence and household wealth that could calm spending in upcoming months, but the combination of strong job growth and healthy wage gains should keep retail growth solid going forward.
Industrial output declines as manufacturing continues to struggle
In the industrial sector, total production fell 0.2 percent in July from June's levels, falling well short of consensus estimates of a 0.2 percent gain. Year-over year growth slipped to 0.5 percent as a result, down from 1.1 percent in the previous month and the slowest pace of yearly growth since early 2017.
Industrial output in July fell despite a 3.1 percent rebound in utility production, essentially reversing the decline in utilities in the previous month. Manufacturing industrial production, which excludes mining and utility production from the total, fell by 0.4 percent. This marks the fifth monthly decline in manufacturing output of the year and drove yearly growth into negative territory at -0.5 percent.
Manufacturing production growth crossed back into negative territory
While the retail sector enjoyed rising sales among the vast majority of industries in July, the industrial sector was plagued by widespread weakness during the month. Nearly two-thirds of the major industries in the sector reporting declining output, including big drops in non-durable manufacturing and mining output.
The manufacturing sector continues to be plagued by slowing global growth, weak business investment, a generally strong dollar, and concerns over tariffs and trade policy. That has been enough to take all of the momentum out of manufacturing activity thus far in 2019
Behind the numbers
On the retail side, July's results continue to point to strength in consumer demand. After a brief pause at the start of 2019, retail spending has been one of the lone standouts for the economy as it shifts into a lower gear. The yearly growth figures are still a far cry from the 6.5+ percent pace seen in the middle of last year, but that is mostly being driven by tougher comparisons this year. The monthly gains over the past few months have been quite impressive.
There are some caveats to go along with this, however. As we mentioned last month, a good deal of the growth in retail is coming from e-commerce sales. The nonstore numbers suggest that July was a particularly good month for online sales, likely boosted by Amazon's Prime Day. This is great news from a volume standpoint for parcel companies, but less encouraging for truckload shipments, which tend to benefit from stronger brick and mortar store performance.
It's also worth noting that many of the goods that were affected by the U.S.-China trade rift to this point have been industrial supplies and components instead of finished consumer goods. As a result, domestic manufacturing has not benefited much from strong domestic consumer demand, as the stronger dollar encourages more imports of consumer goods from abroad.
For the manufacturing sector, the decline in July continues a trend that began at the end of last year. Industrial output and manufacturing declined outright in both the first and second quarters of 2019, which is the first time that has happened since 2016. Third quarter results so far have not fared much better, with these industrial production results joining the softer survey results from the Institute of Supply Management and regional Fed surveys to paint a weak picture of the manufacturing sector. Most of the survey data has not crossed into contractionary territory outright yet, but there is little to suggest any rebound in manufacturing activity is upcoming months.
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