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US July Sales Data Key Test of Covid Resurgence

The US economy was on pace for a steady recovery until Covid-19 cases began to rise in July, triggering several states to reverse their reopening plans. While all sectors are impacted, there is none more so than the retail sector.

Strong retail sales gains in May and June, following the large April decline, set the stage for a solid start to the third quarter. Restaurants, apparel stores and motor vehicles dealers all posted solid increases over the last two months.

So that brings us to July’s release next Friday. Usually retailers enjoy a solid July and August outlook, as both summer spending and back to school shopping add to the bottom line. However, the word “usually” has no place in 2020.

Motor vehicle sales surged in July compared with June, which should again support overall retail sales.

Outside of motor vehicles, there is less clarity. Gasoline station sales could continue to be lifted by higher prices, but with travel well below normal, there is a risk of a decline in the gasoline station sales category.

The clothing sales category, which posted triple-digit gains in each of the last two months, could lose some of that momentum in July. Back-to-school sales of clothing were negatively impacted by distance learning and discounted prices.

Two important series to watch will be the volatile food services and grocery store categories. These were particularly impacted in the first COVID-19 wave and presumably would get hit hardest by a second wave.

Industrial production lifted by stay-at-home orders, vehicles

While the COVID-19 resurgence was a negative for spending outside the home, it was a boon to utilities use.

The increase in cases, and subsequent tightening of regulations, occurred mostly in the southern part of the country. With more staying at home in Georgia, Florida, Texas, and California, it is a good bet that air conditioners got a workout. Even with an offset by seasonally adjustment, utilities use will post a solid gain in Friday’s July data.

At the same time, vehicle production should see another increase, though a third straight triple-digit gain is unlikely. Manufacturing production (both including and excluding motor vehicles) should post another gain, based on the regional and national manufacturing data for the month.

The wild card will be mining production, which has declined for five straight months and is overdue for a small increase. However, the weekly rig count data suggest that another decrease in activity is likely for July.

Inflation measures remain tame, likely overlooked

Energy prices rose at both the business and consumer levels in June, as drivers felt comfortable venturing out in their cars.

July may show a different picture. Interstate travel has been curtailed by state mandates to quarantine after venturing outside of a home state. Add to that the fact seasonal adjustment factors expect gasoline demand and prices to be high in July and it is easy to see the barriers to another energy price increase.

Food prices are expected to post another small increase, driven by shortages in some items. While most food inventories have recovered from the initial run on grocery stores in March and April, there are still some items, such as household goods, that remain in short supply.

Core prices will be more closely watched due to the energy and food volatility, but there may not be much excitement there either. The year/year rate should continue to decline due to the state of the economy. Most analysts remain focused on employment and consumption and assume that inflation will follow along when those indicators improve.

The PPI report will be released on Tuesday, with the CPI report following on Wednesday and the release of import and export prices on Thursday.

Further increase in Covid cases to pull sentiment lower

With more states moving backward in their reopening progress, the Michigan Sentiment Index released on Friday could see another decline in early August after falling sharply in July.

Adding to that is the expiration of enhanced unemployment benefits on July 31, a situation that, in typical Washington fashion, does to appear to have a near-term resolution. As a result, both current conditions and the expectations reading are likely to decline.

Jobless claims still elevated even as special programs end

Initial jobless claims fell to their lowest level since the Covid crisis began, but that is no consolation to the 1.2 million people that filed in the current week or the over 16 million people still on benefits.

The expiration of enhanced benefits could trim new and continuing filings going forward as some displaced workers decide whether state benefits alone are worth the effort. It is more likely, though, that filings will continue at this elevated rate until the situation improves.

The JOLTS report for June released on Monday will give some texture to the large 4.79 million payrolls increase that month. Payrolls rose by 1.76 million in July.

Business inventories down, sales jump in June

In a repeat of the May pattern, business inventories are on track to post a large decline in June, while business sales will rise sharply.

June business inventories are on track to fall by 1.1% when they are released on Friday, pending a revision to the 2.6% decline in the retail inventories number from the advance reading. Wholesale inventories fell by 1.4%, while factory inventories rose by 0.6%.

Based on data already released, business sales are on track to surge by 8.3%. Retail trade sales rose by 6.4% in June, but are subject to revision with the retail sales release. Wholesale sales rose by 8.8% and factory shipments jumped by 9.8%.

release. Wholesale sales rose by 8.8% and factory shipments jumped by 9.8%.

US Inventories and Sales to Date
Source: US Commerce Department

Treasury budget deficits the new normal

The July Treasury budget to be released on Wednesday will reflect the continued impact of Covid-19, with increased outlays and reduced receipts.

The one saving grace for July may be the shift of the April 15 tax date to July 15. This should boost tax receipts relative to a normal July, but this came at the expense of April receipts and will still not be enough to turn the July bottom line into a surplus.

If the expanded unemployment benefit provided by the federal government is not extended into August and beyond, smaller outlays are possible. However, with millions still out of work and many states moving backwards in their reopenings, deficits will continue to pile up for at least the remainder of the year.

Kevin Kastner

Julie Ros

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