Economics
June retail sales weaker than expected
Latest available: June 2008
Release date: July 15, 2008
In June, US retail sales rose a minimal 0.1% compared to an expected increase of 0.4%. A large component of the weakness was attributable to the motor vehicle component where sales dropped 3.3%. Excluding this component, sales were up a more robust 0.8% and followed a 1.2% gain in May. However, the increase was slightly lower than the 1.0% expected within financial markets going into the release.
A solid increase in the ex-auto component was in part a reflection of higher prices for gasoline which helped send service station receipts up 4.6% in the month. However, solid increases also occurred in clothing (+0.6%) and health and personal care (+0.6%) stores that likely reflected more strength in volumes rather than prices. Providing some offset to these gains were disappointing declines in furniture (-1.4%) and electronics (-0.6%) stores. The latter reflected a partial retracement after a 2.3% surge in May. The component of retail spending that directly enters into the GDP addup for consumption, retail sales excluding automotive and building materials and garden supplies, rose a solid 1.0% and represented little slowing from the 1.1% achieved in May.
In a separate report, June producer prices index (PPI) rose a stronger-than-expected 1.8% though this largely reflected a 6.0% surge in energy prices. Excluding this component along with food prices, the core PPI rose only 0.2% slightly under an expected 0.3% monthly rise.
The retail sales numbers, though slightly weaker than expected by financial markets, are indicative of Q2 consumer spending growth of slightly under 2%. It may be the case that the impact from the fiscal stimulus is occurring more quickly than assumed and thus may have just borrowed strength in consumer spending from the expected 4% gain that we had projected for Q3. As well, despite the near-term buoyancy, the impact from the tax rebates is expected to be short-lived and not likely to extend beyond the current quarter. As a result, the recent deterioration in financial markets, and attendant credit tightening, suggests the re-emergence of a downside risk to growth in the final quarter of this year and going into 2009. Bernanke's testimony later this morning will be monitored to see whether the Fed shares these concerns about the risks to growth that have recently been overshadowed by inflationary concerns prompted by rising energy and food prices.
University of Michigan consumer sentiment survey
Latest available: July 2008 (Preliminary)
Release date: July 11, 2008
The headline preliminary University of Michigan consumer sentiment index for July rose unexpectedly to 56.6 (consensus 55.5; prior reading 56.4), managing a tepid bounce off the low since 1980.
The current conditions index rose from 67.6 to 69.5, also bouncing off the low since 1980. However, the economic outlook sub-index fell further to 48.3, a new low since 1980. The one year ahead inflation expectations rose to 5.3%, a high since 1981. The more stable five year ahead expectations remained stable at 3.4%, still a high since 1995.
The decline in the outlook fits with the earlier RBC CASH Index survey showing that consumers expect to spend less in the coming three months, likely as the stimulus from the tax rebates wear off. At the same time, consumers are highly sensitive to the high and rising inflation pressures.
We do not believe that commodity inflation will spiral into wage pressures since the U.S. economy has lost jobs six months in a row. Rather, the high commodity prices will put downward pressure on the economy - first, by squeezing consumer incomes; and, longer-term, by transferring wealth from various parts of the economy, further weakening them, to energy-producing sectors.
RBC's consumer confidence index slips again
Latest available: July 2008
Release date: July 3, 2008
The RBC Cash Index stumbled once again in July, posting the sixth decline in the past seven months. The index stands at 14.6, a record low for the index and off 7.9 points from June. Three of the four sub-components recorded declines, with the jobs index moving up marginally.
The current conditions index slipped to 30.5 in July, a record low for the series, from 40.5 in June. The expectations component fell to -54.7, sending the index to a new record low reading following May's temporary improvement. The investment sub-component also recorded a new record low of 36.1, signalling that households have become increasingly less willing to make major purchases. The jobs index edged up to 89.1 from 87.3 after falling for six consecutive months.
U.S. consumers face the triple-whammy of falling home prices, softening labour market conditions and rising gasoline prices, which has sent most major sentiment indices to extremely low levels. These factors are keeping some consumers on the sidelines, although the initial receipt of the tax rebate cheques in May supported a larger-than-expected increase in retail sales. We expect the tax rebates will support consumption spending throughout the second and third quarters, but the question is whether the tone in the economy will improve enough to rejuvenate consumers' spirits and support a sustained improvement once the effects of the stimulus package wear off.
Personal consumer spending, savings bolstered by tax rebate cheques
Latest available: May 2008
Release date: June 27, 2008
Personal consumer expenditure (PCE) rose a stronger-than-expected 0.8% in May following an upwardly revised 0.4% gain in April (originally reported as up 0.2%). Expectations had been for PCE to be up a slightly smaller 0.7%. The strength was attributable to a surge in personal income, which soared 1.9%, a much larger gain than the 0.4% expected by financial markets and reflecting some spillover effect from the tax rebate cheques.
It had been assumed that all of the effect from the fiscal stimulus would show up in the personal disposable income measure that was, in fact, up a sizeable 5.7% in the month. This surge in income also helped boost the savings rate to 5% from 0.4% in April. However, this fiscal stimulus will only provide a transitory support to income and consumer spending, with the impact dissipating by the end of the third quarter.
The strength in PCE was broadly based with both spending on services and non-durables up 0.4%. Spending on durables rose as well, although by a more moderate 0.1%. Some of the strength in nominal spending may have reflected higher prices for food and energy. However, PCE on a volumes basis was still up a solid 0.4% in May following a 0.2% gain in April.
The strength in energy and food prices was evident in the 0.4% rise in the overall PCE price index in the month. On a core basis, prices were up a more moderate 0.1%.
The rise in real consumer spending in May is encouraging because it indicates that, despite declining employment and falling confidence, the rebate cheques are sufficiently generous to prompt consumers to spend a portion of these monies. As a result, the average level of consumer spending during the first two months of the second quarter is up an annualized 1.9% compared to the first quarter. Continued growth in this key expenditure area of the economy bodes well for the ongoing declines in housing to be more than offset, allowing overall GDP growth to eke out another gain in the second quarter.
With indications that the fiscal stimulus is providing a near-term boost to growth, the Fed has further reason to remain on the sidelines to determine whether the next rate move will need to address rising inflation pressures or a relapse in growth towards the end of the year. Our forecast assumes that Fed funds will hold steady through the middle of next year before the central bank starts to gradually unwind the recent interest rate cuts.
Consumer confidence index plunges to lowest level since 1992
Latest available: June 2008
Release date: June 24, 2008
The Conference Board's measure of consumer confidence plunged to 50.4 in June, the lowest level since February 1992, and well below market forecasts. May's index was revised up slightly to 58.1 from an initial estimate of 57.2.
The report showed declines in both the present situation and expectations indices. The present situation index fell to 64.5 from 74.2, while the expectations index slipped to 41 from 47.3. The jobs-hard-to-get index edged up to 30.5, while the jobs plentiful index edged down two points to 14.1. The difference between the jobs-plentiful and jobs-hard-to-get indices came in at -16.4 compared to -12.2 in May, consistent with a further weakening in labour market conditions. The one-year inflation forecast remained at a record high 7.7%.
The combination of falling home prices (see below), a softening labour market and rising gasoline prices is delivering a triple-whammy to U.S. consumers and continued to weigh on confidence in June.
While these factors are keeping some consumers on the sidelines, the initial receipt of the tax rebate cheques in May bolstered retail activity and we expect they will support a steady acceleration in consumption spending throughout the second and third quarters.
For monetary policy, the Fed's focus appears to have shifted to the inflation outlook and the persistent rise in the one-year inflation forecasts evident in the Conference Board's survey will keep policymakers wary about a pick-up in inflation expectations.
Tax rebate cheques weigh in - Retail sales surge
Latest available: May 2008
Release date: June 12, 2008
U.S. retail sales came in stronger than anticipated in May, rising 1%, double market expectations. The good news went even further back as growth in April sales were revised higher to 0.4% from an originally reported -0.2%. Excluding the usually volatile auto component, sales rose 1.2% (also double market expectations). Despite earlier industry reports of a decline, auto sales advanced by 0.4%, suggesting that the tax rebate cheques are having a widespread beneficial impact.
The strong overall gain in retail sales was widely spread among individual components - all but miscellaneous stores reported increases. Leading the way, as expected, were gasoline stations, where sales grew by 2.6% thanks to a 5% increase in gasoline prices. They were followed by building materials and gardening equipment stores, reporting a large 2.4% advance. The component of retail sales that goes into the GDP add-up, retail sales excluding automotive and building material and garden supply stores, rose 1.1% in the month following a 0.8% increase in April.
With $50 billion in tax rebates mailed out in the month, May's retail sales were seen as an early indicator on the way U.S. consumers would react to the fiscal stimulus package. In the event, the boost to the economy appears to be unfolding as anticipated, perhaps even slightly better. After rising at an annual rate of 1% in the first quarter, U.S. consumer spending is projected to pick up pace to 1.5% in the second quarter. May's strong retail sales report might suggest some upside to this. While the U.S. economy has not skated through its soft patch yet, there have been a number of upbeat indicators recently suggesting that the U.S. economic slide is stabilizing. This is consistent with the Fed remaining on the sidelines through the end of this year.
