Overall retail sales declined 0.3% in May, which was the steepest drop since January 2016. Yet even when autos and gasoline are excluded there was no sales growth. There were declines for restaurants, department stores, as well as appliance and electronics (mobile phones) retailers. E-commerce continues to be the only category to show consistent monthly sales growth. Regardless, the overall trend continues to deteriorate.
Core retail sales, which excludes autos, gas, building materials and food service sales, were flat for the month. This number is important because core retail sales is the figure used to calculate GDP. The trend in the year-over-year rate of growth for core sales has been deteriorating for the past two years, and I expect it to continue to deteriorate due to stagnant to declining real incomes, as measures by average hourly earnings.
Total business inventories, which include those of retailers, wholesalers and manufacturers, declined 0.2% in April, while business sales were unchanged. This report is another negative for the rate of economic growth in the second quarter. The inventory-to-sales ratio held steady at 1.37 for a fifth month in a row. Inventories remain elevated relative to sales, which will continue to weigh on production moving forward and limit pricing power.
Consumer Price Index
In what is a small boost to consumer spending power, the CPI decreased 0.1% in May, led by a 2.7% decline in energy prices, which reduces the year-over-year increase at 1.9%. The core index, which excludes food and energy, rose just 0.1% and is now up 1.7% on a year-over-year basis. When consumer demand is so weak, as indicated by retail sales, companies have very little pricing power. The only positive we can muster from this report is that the decline in the rate of inflation led to a second monthly increase in real incomes.
Real income, as measured by average hourly earnings, rose 0.6% on a year-over-year basis in May. While this is a positive development, I would prefer to see the increase be a result of rising wages rather than a decline in the rate of inflation.
Given the 4.5% drop in building permits last month, it comes as no surprise that housing starts for May were a big disappointment. Starts plunged 5.5% to an annualized rate of 1.092 million, with permits also declining by 4.9%. Starts and permits were down for both single-family housing and multi-family dwellings.
Housing starts and building permits in April were both disappointing. New starts fell for the third time in the past four months to a seasonally adjusted annual rate of 1.172 million, which was down 2.6% from March, while building permits fell 2.5%. The number of units under construction so far in the second quarter is now at a run rate that is 9.2% below that of the first quarter, which will be a substantial drag on economic growth in the second quarter. Housing starts are now down 2.4% on a year-over-year basis.
Last month I pointed out that the 1% increase in industrial production for April was unsustainable because it was fueled by manufacturing. More specifically, a 5% increase in automobile assemblies at a time when inventories are bloated and sales are declining. This proved prescient, as manufacturing declined 0.4% in May, leading to no change in the overall rate of industrial production. This report runs counter to the strength reported in the regional manufacturing surveys. The weakness in manufacturing was also evident with respect to business equipment and high-tech durables. Capacity utilization dipped from 76.7% to 76.6%.
The economic data was disappointing across the board last week in what is looking like a renewed deceleration in the rate of economic growth. I continue to see disappointment ahead, as consensus forecasts for 2017 remain far too optimistic. We may not see a recession in 2017, but we will move perilously close to one if growth continues to slow. This has been my forecast since the beginning of the year. The Atlanta Fed's initial estimate for second quarter GDP was 4.2%. It has now fallen below the Blue Chip consensus forecast to just 2.9%. I think you will see it fall below 2% in the month ahead.
I believe the most important lead indicator for the rate of economic growth is real income growth, as measured by average hourly earnings. I see it as no coincidence that the peak in the rate of real income growth coincided with the peak in the rate of annualized economic growth two years ago.
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Additional disclosure: Lawrence Fuller is the Managing Director of Fuller Asset Management, a Registered Investment Adviser. This post is for informational purposes only. There are risks involved with investing including loss of principal. Lawrence Fuller makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by him or Fuller Asset Management. There is no guarantee that the goals of the strategies discussed by will be met. Information or opinions expressed may change without notice, and should not be considered recommendations to buy or sell any particular security.