Weak US retail sales belie strong fundamentals

Lucia Mutikani at Reuters writes:

U.S. retail sales barely rose in September and producer prices recorded their biggest decline in eight months, raising further doubts about whether the Federal Reserve will raise interest rates this year. The weak reports on Wednesday were the latest suggestion that the economy was losing momentum in the face of slowing global growth, a strong dollar, an inventory correction and lower oil prices that are hampering capital spending in the energy sector. Job growth braked sharply in the past two months.

Readers of the headline Weak U.S. retail sales, inflation data cloud rate hike outlook could be forgiven for believing the US economy is headed for recession. After all, retail sales growth has slowed to a crawl.

Retail Sales

And the producer price index is declining sharply on the back of lower oil prices.

Producer Price Index

But if we strip out food and energy prices, PPI remains close to the Fed’s 2% inflation target. And low energy prices will eventually feed through as a stimulus to the global economy.

Hourly earnings in the manufacturing sector are starting to grow.

Average Hourly Earnings Growth: Manufacturing and Total Private

Deeper in the Reuters article, we find a more objective view:

“The overall message is that consumer spending has remained extremely strong. If sentiment had indeed shifted, it would be hard to explain why sales of cars, certainly among the more expensive items, jumped in September to their highest level since July 2005,” said Harm Bandholz, chief economist at UniCredit Research in New York.

Light vehicle sales continue their upward trajectory.

Light Vehicle Sales

And construction spending is decidedly bullish.

Construction Spending

Not much here to keep Janet Yellen up at nights. When it comes to rate rises, the sooner we get the economy back on a sound footing the better, I say. Otherwise we encourage further capital misallocation and dependency on Fed stimulus. There are no free lunches from central bankers. Everything comes at a price.

It is always important in matters of high politics to know what you do not know. Those who think they know, but are mistaken, and act upon their mistakes, are the most dangerous people to have in charge.

~ Margaret Thatcher: Statecraft (2002)