Diane Swonk, Chief Economist
August 13, 2010 – 8:00 a.m. CT
Retail Sales Rebound on Vehicle Purchases, Inflation Still Contained
Retail sales rose 0.4% in July after falling 0.3% in June, which was a smaller decline than previously reported for the month of June. A rebound in vehicle sales accounted for the bulk of the gain. Retail sales excluding autos rose only 0.2%, with losses widespread and only partially offset by gains in spending on gasoline (prices were higher) and at online retailers. We also spent a bit more at restaurants and bars, as we attempted to drown the sorrows of living in an economy that disappoints more than it satisfies.
Discounts abated slightly, particularly at clothing retailers, which cost them in terms of sales and traffic. A recent push by luxury retailers to curtail promotions, in particular, may be premature. Bonuses in the financial sector are being attacked in the wake of the new financial regulations, and profits are slowing. This, coupled with extreme uncertainty about the course of the economy going forward and recent losses in the equity market, could put a damper on luxury purchases over the summer and into the fall. Consumer confidence is expected to remain particularly depressed given we are more than a year into a recovery.
Separately, consumer prices rose 0.3% in July, as energy prices posted their first increase since January. The core index of consumer prices, which excludes food and energy, posted a more modest 0.1% gain. Increases in apparel and used vehicle prices were partially offset by a decline in service-sector prices. Home ownership costs also edged up for the second consecutive month, but will likely fall again as the recent rise in foreclosures work their way through the market.
Core prices held below 1% on a year-on-year basis, which is well below anything that the Fed feels comfortable with. In fact, most on the Fed would like to see inflation re-accelerate and move above their implicit 2% target for a period (maybe even a few years) in order to get the LEVEL of prices back into a more stable range. This is especially true of home prices, which now appear to have overshot on the downside.
The Bottom Line: The recovery, which was always subpar, has gotten even weaker in recent months. The risks of a double-dip remain particularly high, and unacceptable given the low rate of inflation and high rate of unemployment that we are experiencing. As a result, the Fed is likely to get much more aggressive in its effort to stimulate in the months to come. This will be met with some resistance within the ranks of the Federal Open Market Committee. Those who believe that the Fed is out of bullets, however, don't know Fed chairman, Ben Bernanke, very well. He made bullets appear out of thin air during the crisis, and won't hesitate to buy even more assets than they did during the crisis if it would help avert a more costly loss in momentum or double-dip. A double-dip would raise the risk of the economy entering another Great Depression, an outcome Ben is committed to preventing.
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