Retail sales led the way
- Purchases of goods are expected to rebound 0.6% from July’s decline.
- Retail sales were much better than expected in August.
- Non-auto sales were strong at 1.8% in August.
- Good, solid orders will keep the Fed’s decline on track and support the dollar.
The US consumer has denied forecasts that a slowing economy would reduce retail sales in August. Instead of falling 0.8% as expected, sales jumped 0.7%. Sales outside the production-crippled auto sector grew stronger, rising 1.8% instead of the expected decline of 0.2%.
Retail sales excluding automobiles
There is every reason to expect that durable goods orders, the subset of sales items designed to last three years or more in use, will follow suit.
Durable goods orders are expected to rise 0.6% in August, following a 0.1% decline in July. Orders excluding Transport rose 0.8% in July and orders excluding Defense fell 1.1%. Orders for non-military capital goods, the analogue of business investment, remained stable in July.
Non-military capital goods
GDP and labor market
The US economy slowed in the third quarter. From an annualized expansion of 6.4% in the first half of the year, the Atlanta Fed estimates that GDP stood at 3.7% in the third quarter.
The non-farm payroll increased from one million new positions in June and July to 235,000 in August.
Combined with the restart of pandemic Delta Wave restrictions in some states, the weakening labor market was seen as a logical path to slowing consumption.
Although seven million people have remained unemployed since last year’s closings, this backlog of reluctant workers has had little effect on retail sales and durable goods orders.
One of the reasons is certainly the extended and supplemented unemployment benefits that the federal government and some state governments have enacted. Another is the record number of jobs on offer, 11 million in the August Job Openings and Workforce Turnover Survey (JOLTS). Workers in almost any field can be sure of finding a job whenever they choose to return.
Orders of non-military capital goods
This category of business investment is the main market interest in durable goods orders.
Business investment, as well as consumer and government spending are the main categories of consumption.
Business spending on capital goods tends to be highest when executives expect future sales to increase. They are not just an indicator of current spending, but a window into sales expectations.
Spending on capital goods averaged 0.8% per month this year and helped keep the economic expansion buoyant.
The Federal Reserve’s approach to its moment of decline depends on the continued expansion of the US economy and labor market.
According to President Jerome Powell, FOMC members agree that the economy has met the criteria to start reducing bond purchases.
Yet at Wednesday’s meeting, the Fed chose caution over action.
The dismal August employment figures are probably the main reason for the reluctance, but the drop in retail sales in July is probably another. A good number of durable goods in August, especially in business spending, will help reassure governors that the economy is recovering.
Durable goods will likely vote for cut, higher Treasury rates and a higher dollar.