Financial markets were greeted with a slew of disappointing economic indicators this morning, after the new monetary policy salvo the Fed provided yesterday to raise the level of economic activity. Higher gasoline prices, an increase in auto sales and purchases of building materials (+1.0%) provided a lift to overall retail sales in August (+0.9%). However, excluding these three components, retail sales slipped 0.1% in August versus a hefty jump in July. The turnaround in July retail sales (+0.8%) after a sharp plunge in the third quarter (-1.0%) was seen as a promising start for a new quarter. But, August retail sales numbers have dashed these hopes and left the July retail sales readings as an outlier among retail sales tallies of the past six months (see chart below). The main takeaway is that consumption in the third quarter will not be much to write home about, much like that of the second quarter.
Among the other reports published today, the weak industrial production numbers for August are consistent with the bearish indications from the ISM factory survey of August, which marked the third consecutive monthly reading below 50 (denotes a contraction in factory activity) All major components of industrial production posted declines in August, with factory production plunging 0.7%. At the same time, business inventories rose 0.75% in July, the largest increase since January. The increase in inventories and lackluster consumer spending suggest that production is most likely to be sluggish in the third quarter.
Inflation numbers for August were part of the data releases today. The 0.6% increase of the Consumer Price Index (CPI) during August reflects a 5.6% jump of the energy price index, a 0.2% gain in food prices and a 0.1% increase in the core CPI, which excludes food and energy. Declines in airfares (-1.3%), lower prices for clothes (-0.5%), computers (-1.3%), new and used cars (-0.9%), and tobacco (-0.3%) were a partial offset to the 0.3% increase in owners equivalent rent. The trend readings of overall inflation (+1.7%) and the core CPI (+1.9%) are well within the Feds inflation target of 2.0%, with the latter posting the smallest increase since July 2011. Actual inflation data and inflation expectations are non-threatening, for now, and allow the Fed to focus on economic growth in the perennial inflation-growth debate. So we close the week on a mixed note, with the Fed fulfilling wishes of the markets and economic data disappointing.