Economists Debate Retail Sales Report While Traders Maintain Confidence In Upcoming Fed Hike

The June Retail Sales Report has sparked varying interpretations among economists, resulting in divided opinions on different aspects of consumer spending trends.

Industrial production and manufacturing production both contracted 0.5% and 0.3% monthly in June, respectively, falling far short of expectations.

Traders have largely factored in a 0.25% interest rate increase to 5.25-5.5% by the Federal Reserve in the upcoming week, and they maintain relatively timid expectations for additional rate hikes after the summer, implying 14% probability of a rate hike in September and a 25% likelihood by November.

The U.S. dollar index, as tracked by the Invesco DB USD Index Bullish Fund ETF UUP, inched higher by 0.1%, hitting the psychological 100-level mark.

Now, let’s delve into the main insights provided by notable U.S. economists regarding the June retail sales report:

Jeffrey Roach, Chief Economist for LPL Financial (Charlotte, NC):

• Roach suggests that the retail sales figures indicate a cooling off of consumer activity compared to the previous month.
• Excluding auto sales, there was a 0.2% increase, supported by solid growth in electronics and appliance stores.
• Grocery store sales declined due to lower food prices and weakened consumer demand.
• Non-store retailers experienced a strong 2% increase in sales, marking the highest gain in online sales since last year.
• Roach points out that while retail activity was buoyed by excess savings in recent months, consumers are depleting those reserves and turning to credit to sustain their spending habits.

Quincy Krosby, Chief Global Strategist for LPL Financial (Charlotte, N.C.):

• Krosby notes that despite the disappointing retail number, it still represents the third consecutive month of positive retail spending.
• Consumer confidence surveys have shown improvement, but there has been an increase in loan rejection rates, particularly for individuals with credit ratings below 680.
• As long as the labor market remains strong, consumers are expected to continue driving the economy.

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Bill Adams, Chief Economist for Comerica Bank (Dallas):

• Adams observes that consumer spending growth slowed in June but exceeded expectations for the second quarter, thanks to upward revisions in previously released data.
• Retail sales grew at an annualized rate of 4.7% in Q2, with core retail sales showing robust growth of 6.3%.
• Although trends softened in June, with reduced spending on necessities and gasoline, wealthier households exhibited strong spending, as evidenced by crowded airports and high concert ticket prices.
• Consumer spending helped offset headwinds from inventory de-stocking and an increased trade deficit, likely resulting in a flat real GDP for Q2.

Tuan Nguyen, Economist at RSM US LLP:

• Nguyen highlights a strong increase in underlying retail sales in June, which contrasts with a sharp decline in industrial production, leading to mixed signals about the economy’s health during a crucial period for rate hike decisions.
• Nguyen believes that American consumers still possess sufficient spending power, estimating excess savings to range between $500 billion and $670 billion by the end of Q2.
• However, weak areas in the retail sector include a decline in spending on food and beverage services, as well as significant decreases in department store sales.

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