Retail Sales Rise Thanks to Autos; Industrial Production Sinks Thanks to Autos; Last Hurrah for Autos?

An interesting divergence in auto production and sales came out in separate reports today. Let's start with sales.

Retail Sales Rise Thanks to Autos

The Bloomberg Economic Consensus for Retail Sales was for 0.3% growth. Actual growth came it at 0.2%, nonetheless Bloomberg issued a glowing report, largely on autos, but also because of small upward revision for last month.

For a second report in a row, upward revisions highlight solid growth in retail sales. Retail sales rose 0.2 percent in August with ex-auto at plus 0.1 percent and ex-auto ex-gas at plus 0.3 percent. These are all 1 tenth below consensus. July, however, shows broad upward revisions with total sales at a very strong plus 0.7 percent vs an initial plus 0.6 percent. Ex-auto for July is revised upward by 2 tenths to plus 0.6 percent and ex-auto ex-gas revised upward by 3 tenths to plus 0.7 percent.

Turning first to strength in the August data, motor vehicles rose 0.7 percent on top of July's 1.4 percent gain. These are very solid readings for a very important component that points squarely at a healthy and confident consumer. Restaurants, another component tied to discretionary health, rose a very strong 0.7 percent to extend a run of gains. On the weak side are gasoline stations where, due to lower gas prices, sales fell 1.8 percent. But this decline actually underscores one of the reasons behind the consumer's health unlike, however, declines in building materials, down 1.8 percent, and furniture, down 0.9 percent. Yet both of these declines follow very strong gains in the prior month.

Taken together, July and August point to a very strong start to the third quarter for the consumer, a fact that plays into the hands of the hawks at this week's FOMC. Still, the doves can argue that slowing in August could point to negative effects from China-based volatility.

Recent History Of This Indicator

Retail sales are expected to rise 0.3 percent in August, a moderate gain that would not change the fate of the week's FOMC meeting. But the range of forecasts is wide and a print near the top forecast of 1.0 percent could very well lift the chances of a rate hike. And strength in the month is seen in core sales reflected in the ex-auto ex-gas reading which is expected to rise a solid 0.4 percent. Gasoline stations are expected to post sharply lower sales in line with the month's fall in gasoline prices.

Industrial Production Sinks Thanks to Autos

The Bloomberg Consensus Estimate for Industrial Production was -0.2%, in a range of -0.7% to +0.5%. The actual number was -0.4%, with an interesting highlight.

A reversal in the auto sector pulled down industrial production in August, falling 0.4 percent vs the Econoday consensus for a 0.2 percent decline. The manufacturing component fell 0.5 percent, also deeper than the consensus at minus 0.3 percent. In an offset, gains in July proved more robust than initially reported with total industrial production revised 3 tenths higher to plus 0.9 percent and manufacturing revised 1 tenth higher, now also at plus 0.9 percent.

Motor vehicle production is August's disappointment, down 6.4 percent following July's giant 10.6 percent spike. When excluding motor vehicle production, however, industrial production was unchanged in August following respectable gains of 0.3 percent in the prior two months. But these readings are far from spectacular and the weakness in the latest month could be a signal of retrenchment tied to Chinese-based volatility.

Turning to the report's other two components, utility production rose 0.6 percent in August with mining at minus 0.6 percent. Mining, hit by weak commodity prices, has been hurting all year with the year-on-year reading at minus 3.2 percent. Utilities, however, are up 3.2 percent year-on-year which leads the major components as manufacturing's year-on-year rate is a soft looking plus 1.4 percent. Total industrial production is up only 0.9 percent year-on-year.

This weakness is reflected in capacity utilization which is at 77.6 percent in the August report, down 4 tenths in the month and 2 tenths lower than consensus. Manufacturing utilization is at a soft 75.8 percent vs an unrevised 76.2 percent in July.

The vehicle-led burst in the manufacturing sector faded noticeably by summer's end, a reminder that foreign demand for U.S. goods is weak and that the domestic energy sector is suffering. The consumer is the lead horse for the economy, making up for factory slack that the doves are certain to cite at this week's FOMC.

Last Hurrah for Autos?

In regards to retail sales, Bloomberg commented "Turning first to strength in the August data, motor vehicles rose 0.7 percent on top of July's 1.4 percent gain. These are very solid readings for a very important component that points squarely at a healthy and confident consumer."

In regards to industrial production, Bloomberg commented "Motor vehicle production is August's disappointment, down 6.4 percent following July's giant 10.6 percent spike."

Every month, I keep wondering "Is this the last hurrah for Autos?"

We still do not know.

Every recent downturn in autos has simply led to a greater rise the next month.

Yet, there is one thing we do know: A huge auto slowdown is coming at some point and it will likely hit the economy like a ton of bricks when it happens.

It's fully expected in this corner, but economists and the Fed will be "shocked" when it happens.

Healthy and Confident Consumer?

As for Bloomberg's anecdote about a "healthy and confident consumer", I suggest Bloomberg is in Fantasyland.

Excluding autos, retail sales have been generally weak and confidence numbers are all over the map. Bloomberg ought to know, because it comments on confidence every month.

• The latest University of Michigan "Consumer Confidence Index" is at a 3-month low.
• The latest Conference Board "Consumer Confidence Level" is near an all-time high.
• A recent Gallup "Economic Confidence Index" is near a 10-month low.

For details, please see my September 1 article, Investigating Consumer Confidence: 3-Month Low? 10-Month Low? Near Record High?

Moreover, and as discussed in the above link, confidence and retail spending have at best a weak correlation.

Gallup Confidence Update

Since Gallup updates its Economic Confidence Numbers every week, let's take a quick look. The latest report came out six hours ago.



The trend appears unmistakable to me, and it certainly is not strong. Nonetheless, the consumer sentiment myth goes on and on.

Mike "Mish" Shedlock