Great Retail Sales Report Bolstered By Real Wage Gains

Great Retail Sales Report - Strong Real Wage Growth

June showed us a Great Retail Sales Report and Real Wage Gains. As I will get to later in this article, retail sales growth was solid in June. We must start with why it was strong.

As you can see in the chart below, real wage growth improved in June. Regardless of how nervous consumers are about the trade war, they will likely spend more money.

Especially if they see real wage gains while the unemployment rate is low. These real wage gains are the most important of the cycle because the labor market is nearly full.

Specifically, real average hourly wage growth improved to 1.5% from 1.3%. Real average weekly wage growth improved from 1% to 1.2%.

This is what happens when inflation falls quicker than wage growth.

Great Retail Sales Report - Any economists who state the decline in nominal hourly wage growth is bad are missing the forest for the trees. It would be spectacular for wage growth to rise while inflation falls. But we will take this scenario where inflation falls quicker than wage growth.

The situation is similar for production and non-supervisory workers. Hourly wage growth for these workers increased from 1.7% to 1.9% and their weekly wage growth improved from 1.1% to 1.3%.

Production and non-supervisory workers are doing better than overall workers because the labor market is full. It’s the best time to be a low skilled worker.

Great Retail Sales Report - Strong Retail Sales Growth

Investors who were surprised by the growth in retail sales weren’t following the improvement in real wage growth. June retail sales report was a strong beat across the board.

On a monthly basis, headline retail sales growth was 0.4% which beat the consensus for 0.1% and met the high end of the consensus range. May reading was revised down 0.1% to 0.4%.

Similarly, monthly growth without autos was 0.4% which doubled the consensus and also met the high end of the estimate range. May reading was revised down by the same amount to 0.4% growth.

Gas weighed on headline growth

Great Retail Sales Report - Which is why retail sales growth without gas and autos was 0.7% monthly. It beat estimates for 0.4% and the high end of the estimate range which was 0.5%. That growth was on top of the solid 0.5% growth in May.

Finally, the control group beat estimates and the May reading was revised higher. That’s the perfect combination. Specifically, growth was 0.7% which beat estimates for 0.4%. The May reading was revised from 0.5% to 0.6%.

As you can see from the chart below, retail sales in Q2 in the control group were up 7.52% on an annualized basis. That’s the strongest growth since Q4 2005 when growth was 8.4%.

Clearly, this indicator isn’t signaling the economy is in a recession like the bears claim. Control group sales are being helped by the decline in gas prices.

Great Retail Sales Report - Details Of The Retail Sales Report

Gains in this report were broad based as 11 of 13 categories saw positive monthly growth. Online sales growth was 1.7%, food services monthly growth was 0.9%, autos growth was 0.7%.

Main weakness was at gas stations because of the decline in gas prices. Gas sales were down 2.8% monthly. Headline yearly sales growth was 3.5%.

Core retail sales growth was 4.6% which was the strongest reading since October 2018. Quarter over quarter real sales growth in the control group was 4%. The consumer is on fire.

Monthly growth in motor vehicles and parts sales was 0.72% and yearly growth was 4.1%. That’s different from the flat monthly unit sales growth. Which was, however, impacted by special factors.

Online sales were on fire

Great Retail Sales Report - Monthly growth was 1.69% and yearly growth improved from 12.06% to 13.42%. Non-store retail sales are now 12.45% of total sales.

When this category does well, it has the power to push the overall reading higher. On the other side, department store sales are only 2.18% of the total.

That being said, general merchandise sale growth was 0.23% monthly and 2.53% yearly which is up from just 1.09% growth in the prior month. Weakest categories were electronic stores and sporting goods stores which saw yearly declines of 4.97% and 3.3%.

Great Retail Sales Report - Industrial Production Misses Estimates

June industrial production report was weak unlike retail sales. It followed the weakness in the regional Fed surveys and the ISM PMI. Monthly growth was 0% which missed estimates for 0.1% and May’s reading of 0.4%.

As you can see from the chart below, yearly growth was 1.3% which is a decline from 2.1%. It’s the weakest yearly growth since April. Manufacturing yearly and monthly production growth were both 0.4%.

On the monthly side, growth looks great and on the yearly side, it looks weak. Monthly growth doubled estimates and the prior reading which were both 0.2%.

Yearly growth fell from 0.7% and was the weakest growth since April. As the chart shows, capacity to utilization was 77.9% which fell from 78.1% and missed estimates for 78.2%. There is plenty of slack left in this sector if demand rebounds.

Utilities had a 3.6% monthly decline in production.

Great Retail Sales Report - That’s not something to worry about because the segment is always affected by weather.

Mining had monthly growth of just 0.2% and yearly growth of 8.7%. Manufacturing was bolstered by a 2.9% monthly increase in motor vehicle production and a 0.7% increase in hi-tech production.

Business equipment production growth was 0.5% after increasing 0.4% in May. Similarly, construction growth has been 0.5% and 0.6% in the past 2 months.

Great Retail Sales Report - Conclusion

The economy isn’t on the precipice of a recession like many bears state. Retail sales were strong. This boosted most Q2 GDP growth forecasts.

Consumption growth will be stronger than Q1. But overall growth will be weaker. It won’t be helped by inventory investment and net exports.

Monthly manufacturing growth was strong. But on a yearly basis both manufacturing and industrial production growth were weak. They weren’t in contraction territory yet. Manufacturing isn’t as weak as it was during the 2015-2016 manufacturing recession. 

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