U.S. Shoppers Splurge in Face of Global Headwinds
Thursday’s economic reports provide fresh evidence of a split between consumer-driven strength and weakness in manufacturing
WASHINGTON—American shoppers gave the U.S. economy a boost in July, countering manufacturing-sector weakness, while Wall Street continued to have jitters about faltering growth.
Retail sales, a measure of purchases at stores, restaurants and online, climbed a seasonally adjusted 0.7% in July from a month earlier, the Commerce Department said Thursday.
The robust report—the strongest reading since March—is a positive signal for the U.S. economy, at least for now, amid warning signs of a global slowdown.
U.S. stocks stabilized after release of the sales figures. The government data came as Walmart Inc. reported sales rose in the second quarter, and the retail giant raised its profit forecasts for the year. J.C. Penney Co., however, fared worse in its latest quarter with sales down 9%.
Consumer spending accounts for more than two-thirds of U.S. economic output. Spending gains will feed into the broader pace of economic growth for the quarter, which could offset weakness from manufacturing and business investment.
After the retail-sales report, forecasting firm Macroeconomic Advisers raised its gross-domestic-product growth prediction, to a 2% annual rate in the third quarter from an earlier estimate of 1.7%. The Atlanta Fed said the retail-sales report caused it to raise its estimate of third-quarter growth. Its GDPNow real-time growth estimator now stands at 2.2%, up from 1.9% in the Aug. 8 estimate.
Still, U.S. industrial output fell last month as the manufacturing sector continued to struggle. Manufacturing output, the biggest component of industrial production, fell 0.4% in July from a month earlier, the Federal Reserve said Thursday. That helped tug down broader output across factories, mines and utilities last month.
Trade-related headwinds, weak global growth and a strong dollar that crimps demand for U.S. exports have taken a toll on manufacturers this year, weighing on the U.S. expansion, the longest on record. U.S.-China trade tensions rattled financial markets this week, and another market signal—the yield curve—contributed to the volatility.
The yield on the 30-year Treasury note fell to a fresh record low Thursday as demand surged for long-term Treasury securities amid rising concerns about the risks of decelerating global economic growth. The 30-year Treasury yield fell as low as 1.917% while the benchmark 10-year Treasury yield fell as low as 1.478%, the lowest in three years, according to Tradeweb.
The longer-term trend in manufacturing production shows the sector is pulling back: Output has fallen more than 1.5% since December 2018.
Thursday’s data did little to change the picture for Federal Reserve policy makers. The Fed cut interest rates in late July by a quarter-percentage point in a pre-emptive strike to cushion the economy from a global slowdown and trade tensions, although Chairman Jerome Powell said then that consumption “is the main engine driving the economy forward.”
The reports Thursday provided fresh evidence of a split between strength in consumer-related sectors of the U.S. economy and weakness in the manufacturing sector.
The U.S. experienced a similar situation in early 2016, when indicators pointed to a possible recession: Stock-market declines, a slowdown in job creation, falling corporate profits and contraction in a factory sector weakened by a strong dollar.
Yet the economy pulled through and continued to grow.
Still, Stephen Stanley, chief economist Amherst Pierpont Securities, said that while the current situation looks similar in many ways, “The trade situation is more potent” now.
Although manufacturing accounts for a small share of gross-domestic product, the sector is sensitive to shifts in global demand, making it a bellwether for the broader U.S. economy.
In the second quarter, the U.S. economy slowed but still grew at a solid 2.1% annual rate as strong consumer spending offset a drop in business investment.
“The consumer is still healthy,” Macy’s Inc. CEO Jeff Gennette said Wednesday.
He added, however, that while unemployment remains low, challenges could curtail consumer spending down the road, including the possibility of higher prices stemming from tariffs on some Chinese imports.
While American shoppers were a bulwark to signs of weak growth at the start of the third quarter, recent consumer-confidence surveys show households’ optimism is based on the strong labor market and wage gains.
Slowdowns in the manufacturing and housing sectors “don’t bode well for a diversified and well-supported economy in the second half of the year,” said Lindsey Piegza, chief economist at Stifel Nicolaus & Co., adding “I don’t think the consumer is going to carry the economy alone.”
Some analysts say that rising labor costs, weak earnings and companies’ limited pricing power could prompt them to rein in hiring, a factor that could hurt consumers’ spending power.
At best, earnings across the companies in the S&P 500 will grow 1.5% this year, FactSet projects, far short of estimates for growth of more than 6% that analysts initially forecast in January. Worse, a few analysts predict earnings could end up contracting for 2019 as a whole.
“If the corporate sector is getting pinched, they will react by trying to reduce costs and inevitably that impinges on labor,” said MFR Inc. economist Joshua Shapiro.
Signs of labor-market strain appeared in Thursday’s data. Nonfarm labor productivity rose at a solid 2.3% annual pace in the second quarter, but hours worked declined at a 0.4% annual rate, the Labor Department said.
That marked the steepest drop in workers’ hours since the third quarter of 2009, and pointed to a downshift in business optimism: Companies are more likely to cut hours before they lay off workers.
Kent Lowe, owner of Integrity Heating & Cooling in Charlotte, N.C., said the company saw an unusual slowdown in July, a surprise because the summer is usually the busiest time of year.
“It seems that [customers] were holding off on making that replacement,” he said of demand for heating, ventilation and air-conditioning systems, an expense in the $5,000 to $12,000 range.
“When I see a slowdown like that, I immediately am looking at do I have too many people on staff, because we’re about to go down into a slower time of year,” said Mr. Lowe, who has 18 full-time employees.