Retail Sales Save the Day
Market Commentary
By WSS Research Team

By Carlos Guillen

It is apparent that today's trading session has been saved by better than expected retail sales results, helping to distract investors from the poor economic data in Europe.

Indeed, the strong start to the trading session was fueled by very encouraging data from the Commerce Department that conveyed that retail sales increased at a stronger pace than expected. Retail sales in July increased 0.8 percent, landing higher than the Street's estimate of a 0.2 percent gain and higher than the 0.7 percent decline posted in the prior month. Given the importance of consumer spending, as it represents 70 percent of gross domestic product (GPD), the better than expected result certainly gave credence to the belief that the consumer is still alive. The strength in retail sales came in spite of the most recent gasoline price increases, which would normally frighten consumers from spending more. Apparently, the strength in retail sales may be the result of a stabilizing jobs market. We should note, however, that the most recent jobs data was not so favorable, and consumers may be much less confident in the coming months. Nonetheless, the strengthening consumer demand at the moment raises the possibility that the world's largest economy will weather the effects of a recession in Europe and slower economic growth in China.

Another report today showed prices paid to producers unexpectedly rose in July as food costs picked up. According to the Labor Department, the Producer Price Index (PPI) increased by 0.3 percent in July after increasing 0.1 percent in June, landing above the Street's estimate of a 0.2 percent increase. However, eliminating the noise effects of food and energy, PPI increased by 0.4 percent, also landing higher than the Street's estimate of a 0.2 percent rise. While there had been some worries of price deflation, it is not apparent that this will be of much significance in the near term for the Fed, which may actually detract slightly from QE.

The rather encouraging news from here at home has helped to mitigate the effects from data from the euro zone that showed GDP dropped 0.2 percent in the June quarter. Despite the fact that the contraction came in line with economists' forecasts, it is not really soothing as it does not help cure the real problem in the region, which is its enormous debt burden. Italy, Spain, Greece and Portugal are in a recession. France is walking on a tight rope after three consecutive quarters of zero growth. Even Germany is growing at a decreasing rate, posting a GDP growth of just 0.3 percent in the July quarter after growing 0.5 percent in the March quarter.

So with Europe still a mess, we can take a momentary sigh of relief that the consumer is OK here at home, but how long can this last? With very few indications that the jobs situation will improve and with confidence declining, we cannot paint a rosy picture for the consumer at all.

Add a Comment!