Since the beginning of the year, the US economy has been sending mixed signals. Even though growth was expected to be uneven among the various sectors, economists anticipated that last year’s drag would be a one-timer and that the world’s biggest economy would gain momentum again. It is now obvious that the expected strong recovery is not yet being felt. In spite of a lacklustre overall picture, solid consumer spending since the beginning of the year saved the US economy from stagnation or even worst, a recession.
July retail sales were due last Friday and the least we can say is that it wasn’t pretty. Advanced retail sales came in well below the 0.4%m/m expansion and printed flat, compared to an upwardly revised figure of 0.8%m/m in the previous month. The gauge excluding auto and gas contracted 0.1%m/m in July versus +0.3% expected and +0.8% in June.
Overall, this was a very disappointing report as the trend in core retail sales growth is rather weak with the 6-month moving average currently at 0.4%m/m, suggesting the US economy is definitely not out of the woods just yet. Indeed, continued strength in retail sales may be a game changer for the Fed as it would help to boost inflation against the backdrop of a strong US dollar that makes foreign goods cheaper.
Indeed, the Fed finds itself in a tough position where central banks across the globe are further easing their respective monetary policies, while for its part, the Fed is desperately trying to move in the opposite direction. US consumers are therefore key to the Fed’s normalization process and with July’s disastrous report, we anticipate the Fed to stay definitely on the sidelines.