Three strikes: Retail sales, UMich, business inventories

Investors neared the end of this sultry August week with three economic indicators to contend with, all of which fell short of expectations. Receipts at U.S. retailers unexpectedly fell by 0.6% in July, marking an abrupt reversal from June's 0.2% increase. Analysts called for a meager 0.1% increase. Drilling down, the 1.8% decline in autos/parts and a 0.9% decrease at the gasoline pump helped drag the headline down. But the eye-opening 2.2% decline in the non-store retail segment — which includes online shopping, and suffered a difficult monthly comparison due to June's Amazon Prime Days — likely weighed more heavily on the final number. On the positive side, a 1.9% increase in apparel and the 0.5% growth in food and drink services suggest consumers are not quite down for the count. "Consumers pulled back on discretionary spending after the rising cost of gas and other energy prices strained the cost of living," writes Bill Adams, chief U.S. economist at Fifth Third Commercial Bank, who adds, "The drop in gas station sales is actually good news, since it reflects lower prices." "Also, Amazon Prime Day shifted to late June this year from July last year and contributed to weak non-store sales," Adams says. "But even taking one-off factors into consideration, retail spending was off last month." The "control" figure, which excludes autos, gasoline, building supplies and food services — and is most closely correlated with the personal expenditures element of GDP — dropped 0.4%, a negative image of the 0.4% growth economists projected. And finally, a relic from ancient times shows business inventories were unchanged in June. While that's weaker than the 0.1% consensus, it follows in the wake of May's upwardly revised 0.4% gain. Private inventories detracted 0.7 pps from second-quarter GDP, according to the Commerce Department's initial take released in July. "The June figures on business inventories reinforce the drag that stockbuilding exerted on Q2 GDP," says Bernard Yaros, lead U.S. economist at Oxford Economics. "However, that is unsustainable, as businesses have run down their inventories and need to restock." Speaking of American consumers, who shoulder the load of about 70% of the U.S. economy, their mood has grown more dour than expected this month. The University of Michigan's preliminary take on August Consumer Sentiment shed 4.2 points to print at an even 51.0, more bleak than the 54.5 reading analysts foresaw. Survey participants' assessment of current conditions deteriorated by 5.5%, while near-term expectations slid 8.7%. "Decreases in sentiment were seen across the political spectrum, with Republicans exhibiting the strongest month-to-month decline in August," writes Joanne Hsu, UMich's director of consumer surveys. "Although the early-month weakening in sentiment was pervasive across various demographic groups, notably large reductions were seen among older consumers, lower-income consumers, and those without a college degree," Hsu adds. "These groups are all particularly vulnerable to any erosion of purchasing power stemming from inflation." Respondents expect annual inflation of 4.3% a year from now, up from 4.2% in July and 1.8 percentage points hotter than the most recent core CPI print. Longer-term price growth expectations held firm at 3.3%, or 1.3 pps north of Warsh & Co's 2% target.

Three strikes: Retail sales, UMich, business inventories

Three weak economic prints weigh on markets

Business inventories unchanged, reinforcing GDP drag

UMich sentiment falls and inflation expectations stay elevated

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