US: Soft Retail Sales, Industrial Production, the Yield Curve

Dan North
Dan North North American Chief Economist

Except for the employment report, much of the recent data on the US economy has been soft.  Two more came out this morning. While it’s only one month, the data is weaker than we might have expected given our scenario of good growth for most of the year, but a possible recession in Q1 2020.

  • Retail sales fell -0.2% m/m in April, significantly weaker than expectations of gaining +0.2%.  
  • Weakness was in:
    • auto sales which fell -1.1% m/m, the third loss in four months
    • building material/garden supply down -1.9% m/m
    • electronics down -1.3% m/m to a disturbing-4.3% y/y rate
  • By contrast, higher prices drove gasoline sales up +1.8% m/m, the third straight increase, to +4.9% y/y
  • After stripping out cars, gas, and other volatile items, “core” sales were flat for the month, bringing the y/y rate to +2.9% vs. the longer term average of +4.1%
  • Core sales are a direct input into the GDP calculation, so it does not give Q2 a very good start
  • Industrial production fell -0.5%, the third decline in four months, putting the y/y rate at only +0.9%. the weakest in over two years
  • The manufacturing component also fell -0.5% m/m, also the third decline in four months. As a result the y/y rate fell to -0.2%.
  • 13 of 19 sub-industries are now shrinking on a y/y basis, with apparel being by far the worst at -12.8% y/y.
  • Aerospace is the best at +4.4% y/y, but given recent troubles in the industry, there could be weakness coming.
  • The data confirms other recent reports reflecting manufacturing weakness, including the ISM index which has fallen to the lowest in 2.5 years.

The yield curve continues to bounce off the bottom.

It’s important to note that an inversion of the curve does not happen in isolation.  It’s not just a matter of short term rates going higher than long term rates. It’s part of a story, and in this case the story is a matter of tepid consumption, stumbling manufacturing and housing, a slowing global economy, trade fears, and the damage that tariffs are already causing (see below).  And it’s because that interest rate hikes take around a year to have full effect. In other words, last year’s hikes in September and December will still be slowing the economy out into the end of this year. As a result, futures markets at the moment project a 75% chance of a rate cut by the end of the year.

Here is a set of charts lifted from the Wall Street Journal and Goldman Sachs showing the effects on prices of goods which have already been subjected to tariffs:

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