9/12/2014
By Jennifer Coombs

It was quite a busy economic day for a Friday, but the following major economic releases (unfortunately) didn't equate to a market rally. Nevertheless, these figures show that the US economy is setting up for a healthy recovery in the third quarter of 2014...

Retail Sales

August retails sales indicate that the consumer sector appears to be stronger than originally indicated by employment data: the American consumer is definitely out spending. Also, this is the highest month-over-month gain since April. Retail sales jumped 0.6% in August after a rise of 0.3% in July and was in-line with analyst expectations. When auto sales are excluded, sales gained 0.3% in both August and July, also matching expectations. Excluding both autos and gasoline, sales were still quite healthy as they increased 0.5%, following a rise of 0.3% in July. The leading component, not surprisingly, was in motor vehicles which increased by 1.5%. Next, building materials & garden equipment gained 1.4% - which is also indicative of some improvement in the housing sector. Weakness was led by a 0.8% decline in gasoline sales. Overall, August retail sales were healthy and this may help to boost estimates for third quarter GDP growth.

University of Michigan Consumer Sentiment Index (Preliminary Reading)

The University of Michigan’s Consumer Sentiment Index showed a pretty nice preliminary reading for the month of September. Consumer sentiment climbed to 84.6, compared to August’s final reading of 82.5 and August’s mid-month reading of 79.2. However, we note that the gain in sentiment is honed in on the expectations component, not the current conditions component which unfortunately declined to 98.5 from 99.8 in the final reading for August. This decline in current conditions means that consumer activity is not likely rising in September (however, this may turn out to be false if you consider our inventory comments later in this note). Expectations rose to 75.6 in September versus a 71.3 final reading in August and a 66.2 mid-month reading in August. The gain is likely tied to the decline in gasoline prices and less concern about inflation. On its face, the report looks great, but the softness in the current conditions component gives us pause. Still, when coupled with this morning's strong retail sales report, the consumer sector looks to be on the rise and contributing to at least some economic growth. Sentiment continues to float along while the markets continue to rise steeply (see chart below).

Import and Export Prices

Trade inflationary pressures are soft and are certainly not pointing to trouble for the CPI/PCE report next week. Import prices in the US fell by 0.9% in the month of August, but were skewed primarily due to a 4.4% decline in oil and petroleum. With petroleum products excluded, imports were only 0.1% lower versus last month. The year-over-year rate is back to being negative, after edging higher in the past few months, to -0.4%. Once again, excluding petroleum the number would be much better at +0.8% year-over-year. On the export side, prices fell by 0.5% in August for a year-over-year rate of +0.4%. When agricultural related products are excluded, export prices fell 0.3% for the month, but rose 0.5% compared to last year. There were no major red flags in the price finished goods for imports or exports. The largest year-over-year increase was in consumer goods at 1.0% - this also makes sense given this morning’s report on retail sales.

Business Inventories

The Census Bureau reported that inventory growth is steady and in-line with underlining sales growth – both are a solid positive for US economic outlook. In July, business inventories increased 0.4% compared to a 0.8% increase in business sales which keeps the stock-to-sales ratio unchanged at a healthy and lean 1.29. Retail inventories increased huge at 1.0% which particular strength in autos. However, this is a desired inventory build give the acceleration underway in vehicle sales. Inventories with manufacturers and wholesalers only slightly increased by 0.1% and are likely to be restocked given how strong retail sales were in August (noted this morning). We note that restocking of inventories will be a plus both for future production and employment.

Jennifer Coombs
Wall Street Strategies

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