Retail Sales and Wholesale Prices – “Unchanged” is the Flavor of the Month
September 14, 2011
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The headlines for August retail sales and wholesale prices match the payroll estimate for August – “Unchanged.” The unchanged retail sales reading for August combined with a small downward revision of retail sales numbers for July (+0.3% vs. first estimate of +0.5%) point to a tepid increase in consumer spending in the third quarter. Consumer spending increased only 0.4% in the second quarter. Putting these numbers together, along with Chairman Bernanke’s remarks of concern about consumer spending on September 8, it appears that the economy is in a significantly vulnerable position. The details of the retail sales and employment reports of August make a strong case for Fed monetary policy action at the September 21 FOMC meeting.
In August, sales of gasoline (+0.3%) rose, with retail sales excluding gasoline holding steady. The drop in auto sales (-0.3%) is consistent with unit auto sales numbers. Purchases of furniture (-0.2%) and apparel (-0.7%) also dropped in August. General merchandise (+0.1%) and building materials (+0.2%) posted small gains. Retail sales excluding the usual culprits, autos, gasoline and building materials inched up 0.1% in August. The July-August tally of retail sales yields only a 1.6% annualized increase in total retail sales vs. a 4.7% increase in second quarter. Excluding gasoline, retail sales moved up 1.9% in the July-August months compared with a 3.1% gain in the second quarter. Therefore, as noted earlier, a tepid trajectory for consumer spending in the third quarter is nearly certain.
The Producer Price Index (PPI) of Finished Goods held steady in August after a 0.2% increase in July. Although the energy price index fell in August (-1.0%), the 1.1% jump in food prices and a 0.1% increase in core PPI, which excludes food and energy, were the offsets. A large part of the increase in food prices was from higher prices for meat, eggs, and processed poultry. Higher prices for tires (+1.4%) lead to a 0.1% increase in the core PPI of finished goods. 
At the earlier stages of production, intermediate goods price index and core intermediate goods price index rose 10.3% and 7.6%, respectively. Both these wholesale price gauges suggest that price pressures are abating (see Chart 3). Although it is premature, wholesale prices show a moderating trend and allow the Fed to maintain the easy monetary policy stance. 
