- U.S. consumer sentiment expected to show small decline but remain generally strong
- U.S. retail sales expected to close out Q2 on a weak note
- U.S. CPI expected to show little change from May
- Industrial production expected to show some recovery in June but remain generally weak
- U.S. business inventory correction has further to go
U.S. consumer sentiment expected to show small decline but remain generally strong — The market is expecting today’s preliminary-July University of Michigan U.S. consumer sentiment index to show a small decline of -0.2 points to 93.3. The index showed a sharp +5.7 point increase in May to post a 1-year high but then fell back by -1.2 points to 93.5 in June. The index remains in fairly good shape at only -4.6 points below the 12-1/2 year high of 98.1 posted in January 2015.
Positive factors for U.S. consumer sentiment currently include (1) the record high in the U.S. stock market, (2) the revival of the labor market in June with the +287,000 increase in payrolls, (3) the continued rise in home prices, and (4) reduced expectations for Fed rate hikes. Negative factors include (1) Brexit uncertainty in the global financial markets, (2) the 50-cent rise in gasoline prices since February, although gasoline prices remain historically low, and (3) the toxic U.S. presidential campaign.
U.S. retail sales expected to close out Q2 on a weak note — The market is expecting today’s June retail sales report to show a small overall increase of +0.1%, but a stronger increase of +0.4% excluding vehicles. June vehicle sales were weak and fell by -4.4% m/m to 16.61 million units from 17.37 million units in May. There is no getting around the slump in vehicle sales as auto sales in June fell by -11.7% to a 4-1/2 year low of 6.55 million units. However, truck sales have so far been holding up and have prevented overall vehicle sales from plunging. Truck sales in June fell by -3.8% m/m to 10.06 million units but were still up +5.6% y/y.
The retail sales picture looks better excluding vehicles, with today’s June retail sales report expected to show a +0.4% increase ex-vehicles, adding to the 4-month string of monthly increases in Feb-May totaling +1.8%. On a year-on-year basis, May retail sales ex-vehicles was in fairly decent shape at +2.6% y/y, slightly stronger than the overall May retail sales gain of +2.5% y/y.
The U.S. economic outlook continues to hinge mainly on consumer spending due to weakness in other GDP components such as business investment, net exports, and government spending. The Atlanta Fed’s GDPNow estimate for Q2 GDP is currently +2.3%, which would be an improvement from the weak Q1 pace of +1.3%.
U.S. CPI expected to show little change from May — The market is expecting today’s June CPI report to edge higher to +1.1% y/y from +1.0% in May, while the June core CPI is expected to be unchanged from May’s +2.2% y/y. The core CPI of +2.2% is above the Fed’s 2.0% inflation target. However, the Fed focuses mainly on the PCE deflator for its policy decisions. The PCE deflator remains tame and is not putting any pressure on the Fed for a near-term rate hike. In May, the PCE deflator rose by only +0.9% y/y and the core PCE deflator was up by +1.6% y/y, which were both below the Fed’s inflation target.
Meanwhile, market-based measures of inflation expectations remain tame. The 10-year breakeven inflation expectations rate, which measures the difference between 10-year T-note and TIPS yields, is currently at +1.49%, well below the Fed’s 2.0% inflation target. The downtrend in crude oil prices seen in the past several weeks is helping to put some fresh downward pressure on inflation expectations.
Industrial production expected to show some recovery in June but remain generally weak — The market is expecting today’s June industrial production report to show an increase of +0.3%, reversing most of May’s -0.4% decline. Focusing just on the manufacturing sector and excluding the sometimes weather-related utility sector, today’s June manufacturing production report is also expected to show a gain of +0.3%, reversing most of May’s -0.4% decline. On a year-on-year basis, industrial production in May fell -1.4%, continuing the string of negative year-on-year reports seen since Sep 2015.
The U.S. manufacturing sector continues to be weighed down by weak overseas sales and the weak mining and petroleum sectors. In addition, the U.S. manufacturing sector is now losing the vehicle sector as its primary source of support since vehicle sales are near a 1-1/4 year low. Yet, U.S. manufacturing executives are not giving up hope and the June ISM manufacturing index rose by +1.9 points to 53.2, moving higher from the boom-bust level of 50.0. The ISM manufacturing new orders sub-index in June showed a solid +1.3 point increase to a 3-month high of 57.0, leaving it only -1.3 points below the 1-1/2 year high of 58.3 posted in March. Looking ahead to the July manufacturing confidence, today’s July Empire manufacturing index is expected to show a -1.01 decline to 5.00, falling back after the sharp +15.03 point increase to 6.01 seen in June.
U.S. business inventory correction has further to go — The market is expecting today’s May business inventories report to show a small +0.1% increase, matching April’s increase of +0.1%. The U.S. business inventories-to-sales ratio remains very high at 1.40 months and inventories continue to be a major drag on the U.S. economy. The U.S. business inventories-to-sales ratio topped out at a 7-year high of 1.41 months in Jan-March and fell to only 1.40 months in April, which is far above the average of 1.29 months seen in 2006/07 before the Great Recession began. Inventories have subtracted a total of -1.16 points from GDP over the last three quarters. Considering that U.S. inventories remain high, the inventory correction will continue to subtract from GDP at least through year-end.
