Retail Sales Come in Weak
Overall retail sales in May dropped 0.9%, lower than the consensus estimate for a 0.2% decline. Retail sales excluding autos decreased 0.4%. S&P MMS warned the report could show some payback following the surprising strength seen earlier in the year, and the data fully delivered on that expectation.
As expected, the auto dealer component was a big drag with a drop of 2.5%, which jives with the decline seen in unit sales. But, even outside of autos, there were several components that revealed weakness on the month. Gas stations decreased 3.1%, which was a function of price weakness relative to seasonal trend. And building materials, clothing/accessories, general merchandise, miscellaneous stores, and eating/drinking establishments all revealed declines as well.
Admittedly, the weakness could prove to be short-lived, if much of it is due to poor weather (as the chain store sales reports suggested). But, we would not underestimate the degree to which favorable tax flows were a big boost in the first four months of the year -- suggesting a more challenging trajectory going forward. The weakness in the data suggest second quarter real consumption could come in under 2%.
May PPI Falls 0.4%
The overall-PPI decreased 0.4% in May, while the core index was unchanged. Overall, the data suggest inflation at the wholesale level is non-existent, which supports the view that the Fed can take its time in raising rates.
Of the four major aggregates (energy, food, core consumer goods, and capital goods), not one revealed a positive change on the month. As expected, energy led the weakness on the month, with the aggregate decreasing 2.3% -- led by a 9.6% drop in gasoline prices, as actual NSA trends fell well short of seasonals looking for a big price ramp-up ahead of the summer driving season. Food prices dropped 0.2%, led by weakness in meat prices.
As for the core aggregates, capital equipment prices decreased 0.1% and core consumer goods were flat. Price declines were seen across a number of components. The weakness in price trends is underscored by the year-over-year figures, where the finished goods aggregate is falling at a 2.7% year-over-year rate, intermediate goods are decreasing at a 3.1% year-over-year rate, and crude goods at a 15.8% year-over-year rate.
Overall, the data support the view that the Fed should feel no pressure to raise rates anytime soon and highlight the lack of pricing power currently facing corporations.