There may be a recession coming, but you wouldn’t know by looking at retail sales. Today’s update on consumer purchases for July shows a surprising resilience in the data. Seasonally adjusted retail sales were up 0.5% last month, the U.S. Census Bureau reports. That’s the second monthly increase. In fact, other than May’s modest retreat, retail sales haven’t had a down month in more than a year.
The annual trend look even better, and since this is more telling it’s also more encouraging. Retail sales are up 8.5% in July over the year-earlier period, as the chart below shows. That’s about as good as it gets, which is to say that the annual pace of retail sales has rarely been stronger on an annual basis.
Is the strong trend misleading us because of rising gasoline prices? Not really. If we strip out sales at gasoline stations, the 12-month change still looks strong, as the second chart illustrates. Retail sales ex-gasoline were higher on the year through July by 6.9%, which is near the best levels on record. And with gas prices expected to fall, the energy factor isn’t likely to be a problem for the immediate future.
The bottom line: the pace of retail sales doesn’t suggest there’s a recession lurking. Granted, retail sales are just one statistic and, as usual, we should look to a broader review for a more reliable assessment. But here too there’s reason for thinking optimistically. For example, my equally weighted index of 18 economic indicators rose again in June (the last full month with updated numbers for all reports), following the gain in May. Yesterday’s encouraging news in jobless claims suggests there’s more growth ahead, as does the surprisingly good report for private-sector jobs in July.
The recent gloom can be traced to the weak report in manufacturing for July via the ISM report. The stock market’s swoon is flashing warning signals too. But if you’re looking for bearish confirmation in retail sales, you won’t find, at least not in today’s update.
“I think the markets have been way too pessimistic on the economy,” advises Bernard Baumohl, chief global economist at the Economic Outlook Group and author of The Secrets of Economic Indicators. “Fundamentals are much better, so we will see in the next few weeks a sling back in the stock market away from these persistent declines. We will see that in continuing strength… You have to write off the summer a little bit because of all the political dust that’s kicked up.”
The economy still faces headwinds, a problem that even a surprisingly strong retail sales report can’t erase. But the case for thinking a recession is imminent took another hit today. As such, I’m sticking with my forecast that the economy will muddle on. Why? That’s what a broad review of the numbers (continue) to tell me.