(Bloomberg) — Thursday’s barrage of data provided a mixed view of the US economy in the face of rapid inflation, including milder retail activity and a still vibrant labor market.
Retail sales indicated that spending on goods, while far from collapsing, is declining. Applications for unemployment insurance fell for the fifth consecutive week, indicating that demand for workers remains healthy. Several manufacturing reports, including modest gains in factory production, were also mixed.
The data illustrates several economic cross-currents that the Federal Reserve is dealing with as it attempts a smooth landing while pressing the monetary policy brakes hard to stem the fastest inflation in a generation.
Policy makers are certain to raise interest rates by another 75 basis points next week after government data earlier this week showed that consumer prices accelerated more than expected.
The retail sales report showed that while households are breathing a sigh of relief from lower prices at the gas pump, pervasive inflation is limiting Americans’ ability to spend on discretionary items. Total sales increased 0.3%, although the numbers were not adjusted for price change.
So-called control group sales that exclude food services, gasoline, building materials and cars – used to calculate gross domestic product – were flat in August and the previous month’s gain was half of what was initially reported.
However, the report notes that consumer spending is far from collapsing with eight out of 13 retail categories increasing. Moreover, the data showed a rebound in restaurant revenue which may indicate that service spending remains strong.
What Bloomberg Says About Economics…
“To the extent that weak retail sales reflect moderation in demand, this is a plus from the Fed’s point of view as it tries to tame inflation. However, as consumers allocate more of their money to services, the tepid result may not accurately reflect the underlying momentum of the economy.”
– Elisa Winger, Economist
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A healthy labor market helps explain much of the elasticity in demand. Initial jobless claims fell by 5,000 to 213,000 in the week ended September 10, according to the Labor Department. The four-week moving average, which smooths out week-to-week volatility, fell to its lowest level since June.
Unemployment claims are down as employers are still trying to fill millions of vacancies and keep the workers they already have. Strong demand for labor fuels stronger wage growth and inflationary pressures, which helps explain why the Federal Reserve is trying to cool them.
Meanwhile, the Federal Reserve’s industrial production report showed a slight rise in factory production in August as resilient business investment more than offset the decline in consumer goods production.
While domestic demand generally holds up, manufacturers are facing a number of headwinds including a shift in consumer behavior toward services and a move away from goods. This change in preferences has left some retailers flat, resulting in inventory build-ups and order cancellations adding to pressure on production.
Foreign demand risks easing well, as an energy crisis grips Europe, China’s economy cools, and an appreciation of the dollar increases the costs of American goods for customers abroad.
A pair of regional Fed surveys on Thursday showed mixed results. The gauge of manufacturing in New York State fell again in September on steady orders and shipments after falling the previous month. Meanwhile, the Philadelphia Fed’s gauge has shrunk for the third time in four months.
“With global manufacturing declining due to the double whammy of ‘zero-covid’ lockdowns in China and skyrocketing energy prices in Europe, we expect any further gains in US manufacturing production over the months to come,” said Paul Ashworth, chief economist for North America. The future is similarly silent.” In Capital Economics, he said in a note.
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