Retail Sales OK but Manufacturing Slump Continues

Scott Anderson
Posted by Scott Anderson
Chief Economist

Consumers continued to grow their spending in January in line with our forecasts.

January’s advanced retail sales report showed a 0.3% gain on the month with retail sales excluding autos also increasing 0.3%.

There was a small downward revision in December’s headline retail sales gain to 0.2% from 0.3% as originally reported.

However, the mix of retail sales growth was more heavily skewed toward building materials, as retail sales in this category jumped 27.7% on an annualized basis in January on renewed homebuilding and favorable winter weather conditions.

Auto dealer sales increased a relatively lackluster 0.2%, far below the one percent unit vehicle sales lift in January. Sizable sales declines were seen last month in clothing, gasoline stations, electronics, and health care stores.

The retail sales control group, which excludes volatile gasoline, vehicle sales, and building materials and is used as an indicator of underlying consumer spending trends, were unchanged in January with December’s gain revised down to 0.2% from an originally reported 0.5%.

In other words, the U.S. consumer might not be as healthy as the decent headline January retail sales gain suggests. Indeed, we expect real consumer spending to remain at around 1.8% in Q1, well off the 4.6% Q2 high in 2019 and it may slow further over the course of 2020 as slowing job and real income growth continue to bite.

At the same time the slump in industrial production continued on in January falling 0.3%. This was a bigger decline than consensus estimates but in-line with our forecast.  December’s decline was revised to a larger 0.4% drop as well. The warm weather hit utility production with a large 4.0% January drop, but manufacturing production alone still dropped 0.1% last month.

The hit from Boeing’s 737 Max production shutdown was clearly visible in the 20.7% annualized decline in transportation equipment production. However, a pick-up in vehicle assemblies, petroleum, computer and electronic production in January kept the overall manufacturing production declines from being worse last month.

Bottom-line, lopsided U.S. economic growth driven by consumers, government spending, and housing activity remains in place, but the production and investment side of the economy continues to languish.

To find out how today’s economic releases impacts our forecasts for Q1 2020 and beyond. Check out this week’s U.S. Outlook.

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