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Consumers jumpstarted economic growth in the third quarter with strong spending. Retail sales rose 0.7% in July, almost doubling expectations. Nine of the 13 categories posted gains. The three biggest losing categories were furniture and electronic stores, followed by auto sales. Non-store sales, a proxy for internet sales, surged 1.9%, the most this year, most likely due to Amazon’s Prime Day. In fact, the first 24 hours of Prime Day marked the “single largest sales day in company history,” according to Amazon. There is some debate over how strong consumer demand really is if you take away the Prime Day effect. The fact is, roughly 52% of the more than one million households surveyed by Numerator said they purchased items during Prime Day because they were waiting to buy items on sale. This is a sign that demand remains strong at the right price.
Analysts agree that retail sales for August may be lower, but even if that occurs, the surge in July will have been enough to have a significant impact on third quarter growth. The Atlanta Fed GDPNow forecast increased its call for third quarter growth from 4.1% to 5%, based on the strong July retail sales report. Sales at restaurants and bars, the only service sector in the index, rose 1.4%, double the rate from the month prior. Economists expect the economy to continue moving forward, primarily on the resilience of consumers.
Key Indicators this Week
Housing – Housing starts rose 3.9% in July, tripling expectations, and a nice rebound from June’s 11.7% decline. Permits were not as strong, however, rising just 0.1%, reflecting some concern about future demand. Single-family starts rose 6.7% versus multi-family up 1.1%. The attention to single-family homes versus multi-family is a good step towards reversing the overbuilt apartment arena. The strength in building activity stands in contrast to the latest homebuilder sentiment survey which declined for the first time this year. Homebuilders cited higher mortgage rates (the average rate inched up to 7.16%), high construction costs and lack of workers for the turnaround. After months of not needing to, builders are being forced to lower prices and offer incentives to attract buyers. Builder sentiment was down across the country.
FOMC Minutes – The minutes from last month’s FOMC meeting reminded us that Fed officials believe there is still a battle to be won against high inflation. According to the minutes released this week, “most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy.” The minutes went on to reveal that the risks to achieving the goal of a 2% inflation rate “had become two-sided” and it was important to “balance the risk of an inadvertent overtightening of policy against the cost of insufficient tightening.” The committee noted signs of labor supply and demand coming into balance and conveyed optimism for the U.S. economy in the years ahead. Two members wanted to leave rates unchanged in July but ultimately voted with the group to raise the benchmark rate by 25 basis points to a range of 5.25% - 5.50%. The Fed has repeatedly said future rate decisions will be based on incoming data. The economic data since the July meeting has shown continued economic resilience, stabilizing wages and moderating inflation. The financial markets are, therefore, concluding that the Fed has ample ammunition to wait until the November meeting to orchestrate another rate increase. In the meantime, Treasury yields surged this week, with the 10-year Treasury recaching the highest level since 2008.
Sarina Freedland – Senior Investment Officer
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