Checking In on August Retail and Industrial Data From China and America

Two widely watched economic indicators—retail sales and industrial production for America and China—hit newswires last week. Unsurprisingly, they prompted plenty of chatter (e.g., is American consumer spending slowing? Is the Chinese economy stabilizing?). While these data provide more evidence economic conditions have been holding up better than many anticipated in the world’s largest economies, we caution against drawing large conclusions from them. Let us explain.

In America, August retail sales rose 0.6% m/m, accelerating from July’s 0.5%.^[i] Gasoline station sales (5.2% m/m) led, but growth was broad-based—of the 13 major types of businesses, 9 grew, 3 contracted and 1 was flat.^[ii] August US industrial production (IP) expanded for a second straight month (0.4% m/m) and its manufacturing subsector ticked 0.1% higher.^[iii] In China, August retail sales rose 4.6% y/y, noticeably better than estimates of 3.1%, while industrial production’s 4.5% y/y beat expectations of 3.8% growth.^[iv] The reaction to these reports featured some tempered optimism, though plenty of doubts persisted. Stateside, many viewed growthy retail sales as a sign of ongoing consumer resilience, allowing the economy to avoid recession—though headwinds remain. Views toward the Middle Kingdom also warmed, as some pondered whether “peak pessimism” has passed thanks to policymakers’ recent support measures.

In our view, the latest figures suggest economic activity held up in August, but we wouldn’t read much more into the numbers. For example, seasonal effects likely colored US August retail sales and industrial production to an extent. (Seasonal adjustments usually account for this, but they have been imperfect since the pandemic lockdowns skewed typical trends.) Back-to-school shopping boosted personal electronics and clothing sales while high demand for air conditioning during the hot summer months drove IP subsector utilities’ second-straight monthly rise.

August’s one-offs also didn’t override broader trends. Both headline US gauges are up in six of eight months this year. While higher fuel prices drove retail sales up last month—sales excluding gas stations (0.2% m/m) trailed the headline—this may be a one-off. Sales ex. gas are still up in six of the past eight months, and for the year, its growth has exceeded headline sales. (Exhibit 1) IP’s manufacturing subsector, which tracks factory output and excludes the broader measure’s utility and construction activity, has generally expanded this year, too—albeit, growth has been relatively weaker than the broader gauge.

Exhibit 1: Looking at US Retail Sales and Industrial Production This Year

Source: FactSet and Census Bureau, as of 9/19/2023. “RS” stands for retail sales; “IP” for industrial production.

As for China, the world’s second-largest economy is faring alright despite a struggling real estate sector. August retail sales grew at the quickest year-over-year pace since May. Part of that is due to the base effect, as some COVID restrictions were still in place a year ago—so the return in activity this year flatters the year-over-year comparison. Passenger vehicles sales also contributed to the headline number thanks to discounts and tax breaks for electric vehicles.^[v] Yet growth in China’s primary metric for household spending is consistent with this summer’s travel boom as some economic normalcy returned, benefiting a couple discretionary categories (e.g., jewelry and cosmetics).^[vi] As for industrial production, auto production contributed (up 4.5% y/y) after falling in July—perhaps also reflecting the aforementioned higher demand for electric vehicles.^[vii]

Still, August’s numbers led many to draw sweeping conclusions. For example, some think resilient US retail sales suggests the economy will avoid recession, though the future looks shaky because of higher gas prices and other potential headwinds, including the pending student loan payment resumption. That is a bridge too far, in our view, since retail sales—which aren’t adjusted for inflation—isn’t a comprehensive gauge for consumer spending (a huge chunk of GDP). Hence, excluding gas, it is possible sales fell. That said, retail sales center mostly on goods spending (the only services category is food service & drinking places). But services comprise the majority of consumer spending, and services expenditures have been far stronger than goods this year. We can’t know if that trend held until late this month, when the Bureau of Economic Analysis releases personal consumption expenditures data.

We also don’t think higher gas prices or student loan repayments are likely to murder discretionary spending. Yes, some households will have to adjust their spending, perhaps leaving less for some discretionary retail categories. But don’t overstate the effect—not when the average monthly student loan repayment for all borrowers (pre-moratorium) was $265 and higher wages and salaries have made them less of a burden thanks to inflation. Regarding China, some economists think recent data indicate a deeper downturn now looks unlikely. While we have long thought China’s “hard landing” scenario improbable, improving conditions can help people see reality isn’t as poor as projected—helping uncertainty fall.

In our view, August’s data are further evidence America and China are returning to their prepandemic trends—and for investors, that isn’t a bad thing. (See the 2009 – 2020 bull market, which climbed amid a slow-growth environment.) We see no reason why slower growth would be a problem now.