A Quick Glance at the Latest US Data

Between the G-7 summit, trade talks, ongoing strife in the Middle East and tomorrow’s Fed meeting, Tuesday’s economic releases didn’t get much ink. In a way, that says a lot about where sentiment is right now—things everyone once watched for hints of how tariffs are affecting the economy and recession risk now get short shrift as new fears take over. The fear morph is part and parcel of how bull markets work, but the data themselves are still worth a look, as they help illuminate what markets have been dealing with.

No Surprises in Retail Sales

Though it fell off the front pages swiftly, coverage of retail sales’ fall was broadly pessimistic. Headline sales fell -0.9% m/m, which some outlets called a sign tariff anxiety is weakening spending and, therefore, growth.^[i] Others focused on the -0.9% drop in restaurant sales as potential evidence cash-strapped consumers are pulling back on discretionary spending and affordable luxury.^[ii] Given food service is the lone services category within retail sales—and given services is the majority of consumer spending—some coverage extrapolated the decline as a bellwether for services and spending generally.

It all strikes us as reading too much into monthly swings. Sales jumped earlier this year as consumers front-ran tariffs before the Trump administration’s Liberation Day announcement. That big, 1.5% m/m jump in March was never going to be a sustained growth rate. Rather, it smelled like a one-off that pulled demand forward. Whenever pending changes pull demand forward, whether tariffs here or Japan’s sales tax hike several years ago, they tend to leave a pothole in the ensuing months. The US’s retail landscape appeared to be in that pothole in May.

Consider: While restaurants got attention for falling the most since 2023, the primary detractor was auto sales’ -3.9% m/m decline, which followed March’s 5.7% boomlet.^[iii] People knew tariffs were about to make cars more expensive once dealers worked through inventory, and they raced to get ahead. If you were considering buying a car this summer, it made sense to bite the bullet and do it in March, lest you pay a radically higher price once the tariff was in effect. Multiply that across the US auto-buying public, and you get these sharp swings. Cars that would have been bought in May, June, July, whenever got purchased in March instead.

This doesn’t really tell you much about the broader economy’s health or prospects. It is a consumer behavior story. Restaurant spending’s decline could well be part of this, if households funneled all their springtime discretionary budgets into tariff avoidance. The category isn’t immune to one-off drops. February’s -0.5% m/m restaurant sales drop preceded a 2.5% jump in March, probably as tariff-beating shoppers paused for lunch.^[iv] Drops in January and March 2024 didn’t presage a broader spending decline. Nor did February 2023’s -2.6% m/m jolt.^[v] Not every bad month is the start of a trend. These things take time to materialize.

So overall, we see a pretty big gap between sentiment and reality. If everyone were broadly dismissing this as a nothing-to-see-here tariff after effect, we would be a little suspicious that fear faded so fast. The persistent pessimism we saw instead looks like strong evidence this bull market’s wall of worry is nice and high.

Manufacturing Rolls Along

Coverage of industrial production was also pretty weary. Headlines noted that the topline -0.2% m/m decline masked a 0.1% rise in manufacturing, with utilities’ -2.9% m/m decline the main detractor from overall production.^[vi] But they quickly dismissed manufacturing’s modest growth as a figment of rebounding auto production (up 3.9% m/m), implying weakness elsewhere indicated the true state of US manufacturing.^[vii]

In reality, it was a pretty mixed report overall, in line with the pretty mixed reports we have seen for the past couple of years. Manufacturing of fabricated metal products, nonmetallic mineral products and machinery fell, fueling fears of tariff-induced component shortages weighing on output. But production of textiles, apparel, furniture, electrical equipment and consumer electronics rose nicely. The good and bad simply netted out to meh. Yet even meh is better than the frequent declines that dotted 2024 as manufacturing hit a soft patch globally. That weakness is very familiar to markets by now, and they have already shown they can overcome it.

Yes, a material reacceleration would probably be positive. But the absence of a positive isn’t a negative, especially if expectations are in check—which they are now. So for markets, this report seems largely par for the course.