Retail Sales Strengthen In August As Industrial Production Slumps

Retail sales continued to rebound in August, the Census Bureau reports. Industrial production, however, tumbled sharply last month—the most, in fact, since 2009. But Hurricane Isaac may be to blame for most of the weakness in industrial production, according to today’s update from the Federal Reserve. If so, the strong report for consumer spending in August offers a clearer profile of the general trend last month.

Let’s take a closer look at both indicators. First up: retail sales. As the chart below shows, consumer spending rose 0.9% last month—the biggest monthly rise since February.

More importantly, the year-over-year percentage change in retail sales continues to rise. In the next chart, it’s clear that the trend is improving. For the second month in a row, the annual pace of spending increased, climbing to 4.7% vs. the year-earlier level. Fears that consumption is about to collapse look a bit more overbaked with today’s data in hand.

Some pessimists may be quick to point out that gasoline sales also surged last month, thanks to higher prices at the pump. In turn, that raises questions about what’s really behind the gains in retail sales. But that’s a straw man for analyzing August: After stripping out gasoline sales from the top-line number, retail sales were still up 5% on an annual basis in August–a modest improvement over July’s tidy 4.7% year-over-year change ex-gasoline.
Auto sales, which are notoriously volatile in the short term, were also strong last month. Is this corner artificially skewing the headline results? No. Reviewing consumption ex-motor vehicle and parts data doesn’t change the big picture either. Retail sales less autos rose 0.8% in August, or just below the headline 0.9% increase for the month. More importantly, the annual change in retail sales less autos improved in August, rising 3.4% from the year-earlier level–up from July’s annual increase of 3.2%.
Overall, the August retail sales report is encouraging. Industrial production, however, is another matter, thanks to the sharp 1.2% drop last month. But the Fed advises that “Hurricane Isaac restrained output in the Gulf Coast region at the end of August, reducing the rate of change in total industrial production by an estimated 0.3 percentage point.” Nonetheless, August’s decline is quite striking relative to recent history, as the next chart shows. It’s also quite disturbing–if this weakness rolls on.

How has August’s slump affected the annual trend for industrial production? It’s taken a toll, of course, but only modestly. Industrial production still managed to rise by 2.8% in August vs. a year ago. That’s a decent growth rate, as the final chart below reminds. The question, of course, is whether it can hold?

It remains to be seen if last month’s weakness in industrial production is merely a temporary setback related to Issac vs. an early warning of something more ominous brewing. We’ll know the answer soon. If industrial production’s annual pace weakens further in the months ahead, we’ll have a genuine warning signal on our hands. Given the potential for storm-related mischief in August, however, it’s premature to say if last month is true clue of what’s to come. In fact, given today’s robust retail sales report, the worst you can say about today’s numbers is that the jury’s still out.
As for clear and obvious signs that the economy’s caving, there’s nothing in today’s to feed that beast in the data du jour. Cautious optimism is still the path of least resistance based on the numbers release for August so far. That’s been the message all along when you take a broad read of the economy’s various indicators. Yes, it’s still a precarious expansion, but that’s the point: it’s still an expansion. The numbers may tell us different in the days and weeks ahead, but considering what we know so far, it’s still hard to argue that the business cycle has slipped over the edge.