US retail sales, industrial output suggest strong Q2 growth

Bullish data and Wall Street rally bolsters argument for rise in interest rates

PUBLISHED : Saturday, 16 July, 2016, 1:48am
UPDATED : Saturday, 16 July, 2016, 1:48am

US retail sales rose more than expected in June as Americans bought motor vehicles and a variety of other goods, bolstering views that economic growth picked up in the second quarter.

Those expectations were further reinforced by other data on Friday showing that industrial production recorded its biggest increase in 11 months in June, driven by a surge in motor vehicle assembly. With domestic demand strengthening, inflation is also steadily rising.

The bullish data and a rally on Wall Street could allow the Federal Reserve to raise interest rates later this year, but much will depend on policymakers’ assessment of the impact on the US economy of Britain’s June 23 vote to leave the European Union.

“In normal times, this would be enough for the Fed to continue raising interest rates,” said Harm Bandholz, chief U.S. economist at UniCredit Research in New York. “But Fed officials want to wait and see if and how Brexit affects the outlook for the U.S. economy before pulling the trigger again.”

The Commerce Department said retail sales rose 0.6 per cent last month after gaining 0.2 per cent in May. It was the third straight month of increases and lifted sales 2.7 per cent from a year ago.

Excluding automobiles, gasoline, building materials and food services, retail sales shot up 0.5 per cent after a similar gain in May. These so-called core retail sales correspond most closely with the consumer spending component in the gross domestic product report.

Economists had forecast overall retail sales rising only 0.1 per cent and core sales gaining 0.3 per cent last month.

The better-than-expected rise in core retail sales last month suggested consumer spending increased by at least a 4.5 per cent annualized rate in the second quarter, which would be the fastest since 2006, according to economists.

“While this sort of growth will be hard to emulate in the third quarter, most of the positive fundamentals supporting the consumer remain in place, particularly the healthy state of the labour market,” said Michael Feroli, an economist at JPMorgan in New York.

The Atlanta Fed raised its second-quarter GDP growth estimate by one-tenth of a percentage point to a 2.4 per cent rate. The economy grew at a 1.1 per cent pace in the January-March quarter.

In a separate report, the Fed said industrial output increased 0.6 per cent last month, reversing May’s 0.3 per cent drop. Manufacturing output rose 0.4 per cent amid broad increases in production, including a 5.9 per cent surge in auto assembly.

Warm weather spurred utilities output, also another boost to second-quarter consumer spending.

Mining production gained for a second straight month as an increase in coal output and a rise in oil well drilling and servicing more than offset declines in oil and gas extraction and non-metallic mineral mining.

Friday’s reports helped to offset disappointing financial results from big US banks, hoisting Wall Street to fresh highs. The dollar rose versus a basket of currencies, while prices for US government debt fell.

The strong domestic demand is gradually translating to higher consumer prices. In a third report, the Labor Department said its Consumer Price Index rose 0.2 per cent last month after a similar gain in May. The so-called core CPI, which strips out food and energy costs, also rose 0.2 per cent in June, increasing by the same margin for three consecutive months.

That raised the year-on-year core CPI gain to 2.3 per cent from 2.2 per cent in May. This increase is higher than the average annual rate of 1.9 per cent over the past 10 years.

The Federal Reserve has a 2 per cent inflation target and tracks an inflation measure which is currently at 1.6 per cent.

“Looking ahead to the second half, further stability in commodity prices and fading import price deflation should continue to show up in the form of firmer prices for consumer goods,” said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

Concerns about persistently low inflation contributed to the US central bank keeping interest rates unchanged last month. The Fed raised its benchmark overnight interest rate in December for the first time in nearly a decade.

A fourth report showed consumer sentiment fell in early July as high-income households worried about the impact of Brexit on stock prices. Share prices have, however, since rebounded and are trading at record highs.

This, together with rising wages and higher savings should keep consumer spending supported this year. Retail sales in June were buoyed by purchases of building materials and garden equipment, which jumped 3.9 per cent, the largest increase since April 2010.

Online retail sales rose 1.1 per cent, while receipts at sporting goods and hobby stores shot up 0.8 per cent. There were also boosts from furniture and auto sales, as well a purchases of grooming products. But Americans cut back on apparel purchases and spending at restaurants and bars.