Retail Sales Rise Disappoints

Also, the University of Michigan's consumer sentiment index falls, while wholesale prices edge higer

Overall retail sales rose 0.6% in August, while the ex-auto figure increased 0.7%. The headline figure was well below what was expected, although much of the shortfall relative to expectations was in the vehicle component.

Unit vehicles sales surged 10% on the month, but the related auto and parts component was nearly unchanged. This is a huge discrepancy between the two series, and it would not be a surprise to see this "corrected" via an upward revision to the retail sales component next month.

The ex-auto aggregate was right in-line with expectations, although the risk was skewed towards this figure being stronger than expected as well, which produced some headline-print disappointment here also. But, we would note that the ex-auto levels for June and July were revised higher, which actually left the ex-auto component stronger than we had forecast.

And given that the ex-auto figure is what feeds into the consumption component of gross domestic product (GDP), the report actually raised the outlook for third-quarter GDP -- despite the market's disappointment with the report. GDP growth should now top 6%, with consumption likely to approach 7%. Among the components, strength was fairly widespread again.

Consumer Sentiment Falls

The preliminary September reading for the University of Michigan's Consumer Sentiment declined to 88.2 from August's level of 89.3. While the figure was below expectations, which could add to concerns brought on by today's weaker-than-expected retail sales report, the figure is negligibly different from August's healthy level.

The hope was that the improving second-half outlook and strength in the stock market over the last month would take sentiment higher as well, but it appears that lingering weakness in the job market has more than offset these positives.

As for the components, the current conditions figure slid to 98.8 from 99.7, while expectations decreased to 81.3 from 82.5.

Overall, we would note that the current level of sentiment is still hovering above its historical average of 86, which suggests that even with the decline on the period, sentiment remains healthy. But, until underlying trends in the labor market begin to improve as well, the upside to sentiment will remain contained.

Still, consumption growth in the second quarter improved to 3.8% following the 2.0% gain in the first quarter and the 1.7% increase in the fourth quarter. And given trends in sales through August, consumption growth in the third quarter could approach an impressive 7%.

Wholesale Prices Rise

The U.S. producer price index (PPI) increased 0.4% in August, slightly stronger than anticipated. The core index gained a tame 0.1%.

Most of the price strength during the month was due to energy prices, which surged 1.2% following an 0.3% rise. A 6.3% gain in gasoline prices was the main driver of energy prices, as expected. Residential gas prices plunged 1.5% -- providing a partial offset. Food prices rose 0.7%, which also added to the gain in the headline figure.

Outside of the temporary jump in energy prices and the increase in volatile food prices, wholesale prices remained generally benign. Moreover, a case can be made that the core index is overstating price gains, as auto prices rose 0.3% in the survey despite several industry surveys suggesting incentives jumped on the month with the surge in unit sales.

Indeed, the core aggregate remained just above unchanged (0.4%) on a year-over-year basis, which represents one of the most favorable readings in the history of the data (back to 1973). A tame price backdrop at both the wholesale and consumer level give the Federal Reserve plenty of time to leave rates unchanged while waiting for the labor market to recover amid what is shaping up to be a robust second half of growth.

From MMS International

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