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Retail sales rev up

​​​​Strong July retail sales kick off promising third quarter

Retail sales for July exceeded expectations, growing by a strong 0.6 percent during the month. Excluding autos, retail sales grew by 0.5 percent, also a strong showing. These figures show the third quarter is off to a promising start. In addition, retail sales data for May and June was revised upward, indicating more strength from the U.S. consumer than was originally believed. We are nearing the end of the important July-August back-to-school shopping season.

The National Retail Federation expects back-to-school and college spending to reach $83.6 billion, its highest level since 2012.​​

If retail sales can maintain momentum through August, consumer spending for the third quarter should be roughly equivalent to consumer spending from the second quarter. If that happens, consumer spending's large role in the economy dictates that third quarter economic growth should look similar to second quarter economic growth. You may recall that the economy grew by an annualized 2.6 percent in the second quarter.​

Housing's slow, steady recovery continues despite headline declines

At first blush, the housing starts and permits data released last week looks troubling. But the underlying details are more nuanced. Although housing starts declined by 4.8 percent in July, the decline stems from a 15.3 percent fall in multifamily starts, which fell to their lowest pace since September 2016. Single-family starts declined by a slight 0.5 percent and building permits declined by 4.1 percent in July. But an 11.2 percent decline in multifamily permits caused the overall decline. Meanwhile, single-family permits remained unchanged. Together the starts and permits data indicates that housing's slow, steady recovery continues. 

Importantly, the data also reinforces our forecast that 2017 will be the high watermark for multifamily development in the U.S. With multifamily lenders pulling back and developers and investors striking a more cautious tone, we expect multifamily completions for this cycle to peak in 2017 and slowly decline thereafter. ​

The Fed dials back on inflation?

The minutes from the July's Fed meeting were released last week and showed some loss of faith in inflation accelerating. Most of the participants still believe that temporary factors, such as the wireless plan price war, are weighing on inflation. A small yet growing minority of participants, however, are losing confidence that inflation will accelerate and hit the Fed's 2 percent target rate over the medium term. 

As we mentioned last week, we believe that more durable factors are restraining inflation, which means we probably will not see a third rate increase in 2017. ​

The Fed minutes also reaffirmed our belief that normalization of the Fed's balance sheet will likely begin sometime during the fourth quarter. Chair Yellen is speaking at the Jackson Hole Economic Policy Symposium this week and could convey further information on the Fed's current thinking about monetary policy.

NAFTA renegotiations begin as new data show trade policy risks

NAFTA renegotiations began last week. This will be a long and uncertain process. All sides have their sticking points and pet proposals. While some aspects of the agreement need to be updated, the protectionist tone coming from the administration likely means the negotiators will face significant challenges. As a note of caution on trade, we have previously discussed how the U.S. had increased tariffs on softwood lumber from Canada earlier this year. Russia appears to have emerged as a winner in this dispute, as Russian shipments of softwood lumber to the U.S. are 42 percent higher in the first half of 2017.  These changes have increased costs to homebuilders by roughly 20 percent and dampened homebuilder sentiment in the U.S. 

In addition, rising construction costs make new housing more expensive, pricing out potential homebuyers and keeping renters in apartments even longer.​

More tumult from DC

The fact that Congress is in recess does not mean that everything is at a standstill in Washington. The president fired his chief strategist last week. While that alone would be noteworthy, it takes on additional importance because it continues the flood of resignations and terminations of high-level administration staff and adds to the already long list of distractions that have, to an extent, undermined policymaking. And Congress needs to act quickly to fund the federal government and raise the debt ceiling when they return from their summer recess. Tax reform will have to wait until October at the earliest, which suggests that there is virtually no chance that tax cuts or changes to the tax code will impact the economy in 2017.

What we are watching this week

Housing will be a key focus of the data this week. New and existing home sales data for July will be released. We expect new home sales to have slowed slightly from their pace in June. Meanwhile, existing home sales are expected to have increased slightly from their pace in June, even as for-sale inventory continues to decline which puts upward pressure on home prices.

Thought of the week

Roughly 85 percent of American workers commute by car. Driverless automobiles could make their workdays more productive. ​ 

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