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US July Retail Sales Weaker than Expected, Up 1.2%

Retail sales rose further in July, but the rate of growth slowed dramatically after pent-up demand led to much larger gains in May and June. The resurgence of COVID-19 cases could be a negative in next month’s data.

Total retail sales rose by only 1.2%, well below the 2.0% gain expected, with increases seen in electronics, clothing, and restaurants, the Commerce Department reported Friday.

Motor vehicle sales, however, fell by 1.2% despite a sharp increase in the industry data. Seasonal adjustment issues were the key, as unadjusted vehicle sales rose by 1.3%.

Retail sales excluding motor vehicles rose by 1.9% in July, above the 1.5% gain expected. Gasoline station sales rose by 6.2% after an 14.8% gain in June.

Clothing store sales rose by 5.7% in July, another strong month due to pent-up demand, but a significantly smaller increase than the 98.8% jump in June and a 180.1% rebound in May. The shutdown cut sharply into clothing sales in March and April sales due to social distancing.

Electronics and appliance store sales have jumped in recent months, up 22.9% in July after a 37.6% increase in June. As with clothing, this sales category was hit hard by the shutdowns, but has recovered over the last three months.

Food services and drinking place sales rose by 5.0% after a 26.7% gain in June, as restaurant restrictions loosened further in some areas. Building material sales fell by 2.9% in the month after a 0.8% June increase.

Sales at non-store retailers, which represent Internet-based outlets, rose by 0.7% after a 2.1% decline. This category has slipped recently after a surge during the lockdowns in March and April.

The closely watched control group – total sales excluding motor vehicles, gasoline, building materials, and food services – rose by 1.5% after a 6.0% gain in June and a 10.0% increase in May, a positive start for third quarter consumption.

June retail sales were revised up to an 8.4% gain from the 7.5% jump previously reported, while ex-motor vehicle sales were revised up to an 8.3% increase from the previously reported 7.3% rise.

Released at the same time, non-farm productivity rose by 7.3% in the second quarter, a much stronger increase than the 1.0% rise expected.

In line with the sharp plunge in GDP growth, the output component declined by 38.9% after falling by 6.4% in the previous quarter. However, this was more than offset by a 43.0% decline in hours worked in the quarter due to the sharp reduction in employment, allowing productivity to post a solid gain in the quarter.

Despite the productivity jump, unit labour costs rose by 12.2%, stronger than the 5.7% surge expected. Unit labour costs rose by 9.8% in the first quarter.

The gain in unit labour costs is the result of a temporary effect, as layoffs were disproportionately seen in lower income positions. That impact has already been seen in a run-up in monthly average hourly earnings and is now reflected in a 24.8% jump in compensation growth for the quarter.

On a year/year basis, productivity rose by 2.2% after a 0.9% increase in the previous quarter. Unit labour costs were up 5.7% in the second quarter, a much stronger pace than the 2.5% gain in the first quarter.

Released later in the morning, industrial production rose by 3.0% in July, exactly as expected, with motor vehicle production again a main mover – but not the only one this time.

Manufacturing production rose by 3.4%, above the 3.0% gain expected. Motor vehicle production rose by 28.3% after triple-digit gains in the previous two months, continuing the recovery in the sector. After the July gain, the index for motor vehicles sits at 130.5, just below the pre-COVID 130.9 reading in February.

Excluding motor vehicles, overall industrial production would have been up only 1.7% and manufacturing production would have been up 1.6%, so the motor vehicle category was still the driving factor.

Utilities production rose by 3.3%, with electricity production up 3.9% and natural gas production up 0.2%. Mining production rose by 0.8%, breaking a string of declines even as rig counts have declined. Mining production is still down 17.0% from a year ago.

Later, the Michigan Sentiment index rose slightly to 72.8 in early-August from 72.5 in July, with the University of Michigan noting that lower interest rates boosted buying plans. Analysts had expected the index to decline to 71.9.

On the downside, though, concerns about the five-year economic outlook slipped, Michigan noted. The gridlock to passing further stimulus reduced confidence in economic policies to the lowest point since President Trump entered office.

There are also concerns that the resurgence of COVID-19 cases will worsen as schools begin in the fall.

The current conditions index fell to 82.5 from 82.8, while the expectations reading rose to 66.5 from 65.9.

Released at the same time as Michigan, business inventories fell by 1.1% in June, with retail inventories unrevised from the 2.6% drop in the advance reading. Wholesale inventories were already reported down 1.4%, while factory inventories rose 0.6%.

Business sales surged by 8.4%, with much stronger sales at all three levels of the pipeline. The pace of growth will likely slow in July based on the more modest retail sales increase announced earlier Friday.

Kevin Kastner

Julie Ros

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