EMPHASIZE THE POSITIVE

Two data points are a drop in the economy. But the two that rolled off the wires this morning caught our attention just the same. Such is life in these data-dependent times, when every scrap of new information is inhaled in search of clues about tomorrow. In that state of mind, we found reason to do a double take at the sight of retail sales posting dramatically slower growth while import prices continue to reach upward. Was this something to worry about? Or should we simply chill and switch to decaf?
U.S. retail and food services sales for August grew by just 0.2%, the Census Bureau reported. After July’s 1.4% surge over June, 0.2% looks a tad thin. Meanwhile, the Labor Department advised that import prices jumped 0.8% last month and the original estimate for July was revised up to 1.0% from a mere 0.1%. The combination of slowing consumer spending and rising prices by way of the nation’s voracious appetite for imported goods is something less than ideal at this moment in the economic cycle. Gee, what will Bernanke think?
Of course, one could opt to emphasize the positive, such as it is. Let’s give it a whirl, shall we? Let’s start by noting that the 0.2% rise in retail sales is an improvement over the consensus outlook that called for a slight decline of -0.2%. In addition, retail sales look more robust by comparing August’s tally to its year-earlier total. By that measure, retail sales jumped 6.7% on the year, or more than twice as high as the economy’s pace of growth in the second quarter. Not too shabby for a consumer population that’s thought to be laden with debt.
David Resler, chief economist at Nomura Securities in New York, finds reason to see the glass half full rather half empty on the retail front. The “underlying retail trend has picked up a bit after a sluggish second quarter and seems to be growing at a pace that is consistent with trend-like growth in overall consumer spending,” he wrote in a note to clients this morning.
Over on the imports ledger, prices are advancing at a far slower pace once you remove energy from the calculation. While import prices overall rose 0.8% last month, the climb was a lesser 0.5% for non-petroleum imports. The year-over-year record is also slower once you take out energy: 2.7% vs. 6.6%. In addition, the 12-month rate of change for top-line import prices slowed again last month, as it has in the two previous months. The trend, at least, is encouraging. Meanwhile, the fact that oil prices have been dropping of late adds to the hope that the import prices will be revised down.
Mr. Market, in fact, continues to emphasize the positive. The initial reaction among traders in Fed funds futures to the news this morning on retail sales and import prices tells the story: the October contract is virtually unchanged, priced in anticipation for more inertia at next week’s FOMC meeting, i.e., keeping Fed funds at 5.25%.
Steady as she goes, an optimist might say. One more hurdle before the weekend. Let’s see how cheerful we are after reading tomorrow’s report on August consumer prices. Meanwhile, optimism springs eternal…at least through the end of trading today.