U.S. June Retail Sales Show Minimal Rise

Retail spending in June managed an increase in the month, albeit barely so, rising 0.1%; nevertheless, this was stronger than the 0.1% decline expected. The decline in May was lessened slightly to a 0.1% drop rather than the 0.2% decline reported last month. A decline in June had been expected on the basis of the earlier reported drop in unit auto sales; however, some of that weakness seemingly reflected fleet sales to business as the auto component in today’s consumer retail sales report showed a modest 0.8% increase. Excluding autos, retail sales were flat, which was in line with expectations yet down from a 0.2% rise in May.

The increase in ex-auto sales was limited by a 1.3% decline in sales at service stations. The weakness in this nominal total was expected in the face of indications that gasoline prices have started to trend lower in the face of weakening crude oil prices. Excluding both the auto and service station components, sales rose 0.2%, which was below expectations of a 0.4% rise and was unchanged from a revised increase in May of 0.2% (originally reported as up 0.3%). Although department store sales rose a solid 1.4%, they were notable declines in furniture (0.8%) and electronic (0.2%) store sales.

The stronger than expected gain in retail sales is modestly encouraging, but it continues to suggest that the pace consumer spending is languishing at around half the pace of the 3.2% pace achieved in the last half of 2010. As the Fed has speculated in Wednesday’s Congressional testimony, the weakness was in part the result of some temporary factors such as the rising gasoline price impairing disposable income and supply-chain disruptions limiting availability of various car lines. With these restraints expected to ease going forward, the probability of consumer spending returning to the pace achieved last year clearly rises. Such a rebound, however, is also contingent on employment recovering from the disappointing gains in May and June 2011. On this front, the drop reported in jobless claims, also reported this morning, is encouraging. To assure that the recovery in employment and thus household spending is sustained, monetary policy is expected to remain highly accommodative. This is expected to entail fed funds remaining unchanged well into 2012. In the event that the weakness in employment was to persist, the Fed, as articulated by Bernanke before Congress yesterday, has the means to ease conditions further.

In a separate report out this morning, jobless claims for the week ending July 8 contained some encouraging news with claims dropping to 405,000 from 427,000 last week (revised up from an originally reported 418,000) and compared to expectations of an increase of 415,000. It was noted that there were fewer layoffs in the auto sector. This provides some confirmation that the supply-chain problems in the motor vehicle sector may have advanced summer shutdowns for retooling. This would explain why claims were generally higher than expected in June and augurs well for further declines in July. This factor could potentially explain some of the weakness in June payroll employment and a reason to expect greater strength in July.

In another report out this morning, producer prices in June dropped a sizeable 0.4% and compared to expectations of a 0.2% drop. As expected, the gasoline component contributed to the decline dropping a sizeable 4.7%, therein reflecting declining crude oil prices. There was also a sizeable 1.9% drop in heating oil. On a core basis, prices rose 0.3% and compared to expectations of a 0.2% rise. The unexpected pressure was largely concentrated in light trucks (1.6%) and plastic products (1.5%). The former likely reflected supply-chain problems while the latter was a lagged response to the earlier increase in crude petroleum prices.