Rounding Up Recent US Economic Data

Lingering fears of a US recession remain, with many scouring labor market data for clues. But recent releases in less-lagging indicators don’t support the notion. Tuesday brought the latest batch: retail sales, industrial production and business inventories, with plenty of positive surprise suggesting a bullish gap between expectations and reality remains.

August retail sales revealed optimism.

Retail sales rose 0.1% m/m while the core measure (excluding automobiles, gasoline, building materials and food services) rose 0.3%—both beating analysts’ expectations.^[i] July’s readings were also revised up. Sales at online retailers and the catch-all “miscellaneous stores” drove most of the growth, rising 1.4% m/m and 1.7%, respectively. This helped offset weak automobile sales, which slipped -0.1% m/m after a strong July.^[ii] Though a wider scope tells a different story—sales at auto and other motor-vehicle dealers grew 1.3% y/y—the trend here is a mostly sideways drift since January 2023.^[iii]

Coverage largely couched August retail sales as a further encouraging sign after July’s rise defied recession fears, with some suggesting the US economy is now on firmer ground. For investors, this might signal sentiment is warming a touch after widely watched measures took a knock this summer amid recession calls and stocks’ early-August pullback. Now, on the heels of some positive data and a Fed rate cut, folks could see rosier outcomes on the horizon.

Notably, retail sales don’t capture most services—the lion’s share of developed economies’ spending—and other gauges show rather sturdy services spending. While August data aren’t out yet, the Bureau of Economic Analysis’s personal consumption expenditures (PCE) index shows Americans’ real (inflation-adjusted) spending on services grew in all but four months since August 2022—three of which were flat.^[iv] Goods spending hasn’t matched this strength, cooling after a post-reopening boom shifted consumer demand away from a lockdown-driven goods boom to services. While headline retail sales often garner attention, they leave a blind spot to the largest, most important areas of consumer spending. They could easily have fooled investors into thinking conditions were weak over the past couple years when the reverse was true.

America’s factories rebounded but didn’t reveal much new information.

According to the Fed’s latest report, industrial production (IP) rose 0.8% m/m last month, beating previous estimates and erasing a chunk of July’s (downwardly revised) -0.9% drop.^[v] Manufacturing (the largest industry group) and mining led the way, growing 1.0% m/m and 0.8%, respectively, as strong production for transportation equipment and primary metals boosted the results. Utilities production—e.g., electricity and natural gas—was flat, but this followed a weak July. Notably, natural gas production ticked up 0.4% m/m, adding to the existing glut.

Like auto sales, manufacturing data have trended flattish lately, and August’s IP report adds to this. The most interesting wrinkle, to us, is what it shows about a related data series: purchasing managers’ indexes (PMIs). The Fed’s monthly IP gauge has been sporadic this year, growing in four of eight months but never rising or falling more than two months in a row. Meanwhile, S&P Global’s manufacturing PMI registered expansion (or hit 50, which divides expansion and contraction) in the year’s first six months before slipping in July and August.^[vi] The Institute for Supply Management’s (ISM) PMI spent every month but March in contraction—though it did tick up in August, implying negativity was less widespread.^[vii] The divergence is a timely reminder: IP and PMIs measure different things and don’t move one-to-one. IP measures growth’s magnitude, while PMIs report growth’s (or contraction’s) breadth. If a minority of firms grew—but grew a lot—it could lift IP despite a contractionary PMI.

Overall, manufacturing has been soft since July 2021. We suspect this is also tied to the post-COVID goods spending boom, as demand shifted to services and factories didn’t need to produce as much. Either way, it is a mistake to overrate manufacturing’s economic influence. It represents just 11% of US GDP—it isn’t America’s economic engine.^[viii] Again, like spending, that title belongs to the mighty services sector, which has been in fine shape for a while.

Inventories jumped, hinting at businesses’ restocking.

The Census Bureau’s latest report showed business inventories rose for an eighth consecutive month, up 0.4% m/m in July—slightly edging analysts’ expectations.^[ix] Retail inventories excluding autos, which feeds into GDP calculations, rose 0.5% m/m.^[x] This hints at inventories again adding to GDP in Q3, barring a reversal in August and September—contributing to the Atlanta Fed’s GDPNow estimate of 2.9% annualized Q3 growth.^[xi] Separately, business sales rose 1.1% m/m, bringing the inventory-to-sales ratio (approximately how many months it would take for businesses to clear their shelves) down to its long-term average of 1.37 months, where it has floated since 2023’s start.^[xii] Generally speaking, a lower ratio means demand is clearing stockpiles at a decent clip, while a higher ratio suggests a glut could be building.

Inventories are always up for interpretation, as big growth adds to headline GDP but may imply weak sales. But given the average inventory-to-sales ratio, this looks more like the ongoing restocking we expected this year—not a burgeoning glut. After negative readings in Q4 2023 and Q1 2024 implied businesses drawing down stockpiles, inventories’ contribution to GDP edged slightly positive in Q2.^[xiii] PMIs—both manufacturing and services—mirror this trend, too. Both the ISM manufacturing and S&P Global services PMIs’ inventory indexes flipped from contraction to expansion in August.^[xiv] When paired with August’s solid goods sales, it seems businesses are replenishing their warehouses, not overloading them. In our view, restocking could be an early sign of America’s corporations going on offense after months of buckling down and going lean for a recession that never came. If so, it would bode well for growth ahead.

Of course, all these data are backward looking, so stocks likely reflected them well in advance. But the slate of growthy, better-than-estimated reads suggests investor sentiment is far from the euphoric conditions that can usher in new bear markets. In other words, this bull market seemingly has plenty of fuel in the tank.