August retail sales and producer inflation show a hot summer finish

REAL ECONOMY BLOG | September 14, 2023

Authored by RSM US LLP

The U.S. economy ran hotter than expected in August even as the momentum in spending slowed down.

Retail sales and producer inflation came in significantly higher than forecast, while initial jobless claims were lower than the market consensus.

But the downward revisions to retail sales in the prior month, the sharp pullback in sales from the control group, which feeds into the calculation of gross domestic product, and a steady increase in prices should keep overall spending, after adjusting for inflation, looking much less impressive.

It is also important to note that the data will be subject to revisions in the next release; therefore, we should not take the data on retail sales at face value right away. If more downward revisions are coming next month, sales of the control group might very well be revised to show no change or a small drop.

This means that economic growth in the third quarter should be closer to our forecast of 2.7%, with some upside risks, than what the Atlanta Federal Reserve is predicting at 5.6%.

Retail sales

Sales at retail stores, online and restaurants rose by 0.6% on the month. The control group—which excludes volatile components like gasoline, automobiles, building materials and food—grew by 0.1%.

While sales in July were revised lower—to 0.5% from 0.7% for total sales and to 0.7% from 1.0% for the control group—on the three-month moving average annualized, sales rose markedly to 5.2% and 5.7% for total sales and the control group, respectively.

That is most likely a significant boost to consumption spending in the third quarter and is a reason for our forecast that GDP will grow by 2.7%.

A large portion of the increase in sales came from higher gasoline prices, which also pushed up producer inflation on the month. Sales growth, however, was broad-based, with only three out of 13 categories posting a drop. Furniture declined by 1.0%, sporting goods by 1.6% and miscellaneous by 1.3%.

Nonstore sales, made up mostly by online sales, were unchanged on the month likely because of a robust July with the record-breaking Amazon Prime Day.

Clothing sales grew by 0.9% for the second month in a row, reflecting strong back-to-school demand. At the same time, spending on food and at restaurants slowed down in the last month of the summer, growing by 0.4% and 0.3%, respectively.

Producer inflation

Prices paid by producers rose by 0.7% in August, the largest increase since June of last year, mostly because of energy prices, which grew by 10.5% on the month.

Excluding food and energy, core inflation remained grounded at 0.2% while July’s increase was revised up to 0.4% from 0.3%.

Despite that, the headline year-ago inflation figure remained below the 2% target, at 1.6% for overall inflation, while core inflation was not much higher at 2.2%.

Trade services, a proxy for wholesale and retail profit margins, dropped by 0.3% on the month after rising by 2.1% in July, most likely reflecting some of the slowdown in underlying spending and discounts by producers at the end of the summer.

Prices for intermediate and unprocessed goods and services also remained grounded except for fuel and energy.

Initial jobless claims

New claims for jobless benefits inched up by 3,000 to 220,000 for the week ending Sept. 9, bringing the four-week moving average down to 224,500.

New claims, a proxy for layoffs, have been remarkably low for the past four weeks, especially when compared to the 250,000 level that we consider a threshold indicating recession.

With such robust end-of-summer spending, it was not a big surprise that layoffs stayed that low.

The outlook remains that the labor market will slow down into the fall and toward the end of the year, but so far, the labor market has held up.

Continuing claims also inched up to 1.688 million for the week ending Sept. 2, from 1.684 million.

Note that both weeks included the Labor Day holiday, which can add seasonal quirks to the data.

The takeaway

While the economy ran hot in the last month of the summer, underlying spending cooled a bit as the momentum from July did not carry over entirely. We expect the Fed to look through a hot summer of spending to keep rates steady, not only at its meeting next week but also for the rest of the year.