Retail sales and industrial production rise in May

The soft rebound in May’s retail sales was good news, suggesting that the economy might reach a soft landing sooner than expected. Total sales increased by 0.1% while the control group, which is the key metric that feeds into gross domestic production calculations, rose by 0.4%.

With April’s data revised down, the three-month moving average annualized readings for both the top line and the control group came in at 1.9%. This represents a much more sustainable level of spending that won’t exacerbate inflation concerns.

Because goods prices dropped in May and the sales numbers cover mostly goods spending, it is safe to assume that the inflation-adjusted sales numbers should be much higher than what the top line suggested, likely an increase of 0.3% to 0.5% for the month.

Retail sales

In other words, American consumers continue to show a strong appetite for spending, and the drop in inflation over the past two months has been more of a tailwind.

We think the data provides more reasons to support a rate cut sooner rather than later, as a soft landing is in sight.

Industrial production

In a separate report on Tuesday, industrial production volume posted a significant upside surprise, rising by 0.9% on the month, much higher than the market forecast of 0.3%, the Federal Reserve reported.

The increase was broad-based, led by manufacturing, which also rose by 0.9%.

Given data on both spending and production, we are more confident that GDP growth in the second quarter should arrive around 2.5% with risks to the upside.

Inside the data

The sales data continued to confirm existing trends that we believe are necessary conditions for achieving a soft landing: weaker demand for durable goods, lower gasoline prices and solid spending elsewhere.

High interest rates have helped keep a lid on durable goods, which are much more sensitive to higher borrowing costs. But that did not mean American consumers would stop spending altogether. Except for furniture, building materials, gasoline and food, sales were up in all categories.

In terms of industrial production, besides the increase in manufacturing volume, utilities rose by 1.6% while mining rose by 0.3% in May. Driving most of the increase in manufacturing were consumer goods, rising by 1.3%, signaling an upswing in inventory built up that should be a tailwind for overall growth in the second quarter.

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This article was written by Tuan Nguyen and originally appeared on 2024-06-18. Reprinted with permission from RSM US LLP.
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