Retail Sales Surprises, but Industrial Production Disappoints

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Economic Report Monitor #42
June 16th, 2020

Some mixed economic reporting today continued to encourage volatile trading as indexes jump after a few days of losses. Making the headlines was a retail sales jump of 17.7% in May that beat expectations strongly. Industries that were most affected by the lockdown saw huge rebounds as reopening processes ramp up. Furniture store sales jumped 89.7%, clothing & clothing accessories store sales skyrocketed 188.0%, and sporting goods, hobby, musical instrument, & book store sales grew 88.2%. Food services & drinking place sales were up just 29.1% though as these non-essential businesses lagged. Businesses that didn't see a dip in demand remained cool in this report. Food & beverage store sales were up just 2.0%, health & personal care stores mostly flat at 0.4%, and general merchandise stores saw a bump of 6.0%. These numbers are mostly surprising because for most of May the lockdown was in effect with just the back end of the month seeing any kind of reopening. June data is likely to be just as good if not better since reopening processes have progressed even further.

While retail data surprised, the Fed's industrial production data left a lot to be desired. The total index increased just 1.4% in May after falling -4.6% in March and -12.5% in April. Consumer goods and business equipment groups, the final product indexes that might be expected to rebound like retail sales, only grew 3.9% and 5.8%. Construction supplies only grew by 1.6% despite real estate remaining strong. Manufacturing increased by 3.8% while mining took a further tumble, down by -6.8%. Capacity utilization remained near the COVID-19 lows, up just 0.8% to 64.8%. Durable goods utilization increased 3.1% to 57.1%, but was still below 2009 lows. One possible explanation for production lagging sales data is firms are cycling through inventory that was left over from the drop in sales from the lockdown.

On the subject of inventories, the April 2020 business inventories report came out showing a -1.3% drop in inventories as sales dropped further. Inventories/sales ratios grew as fell pointing out that the drop in inventories wasn't a result of hot demand. Manufacturers saw a smaller drop in inventories, down -0.4%, while retailers' inventories fell harder, down -3.7%. Most of that movement was from an increase in the previous month on a severe drop in sales. The trend was most prominent in motor vehicles & parts dealers where inventories jumped 4.8% in March then dropping -8.4% in April. Despite most industries being down from a year ago, inventories/sales ratios have shot up. The largest jumps were in furniture stores, 1.89x to 3.37x, clothing stores, 4.77x to 18.94x, and department sales 3.58x to 2.72x. In prolonged sales droughts like this, demand drops are felt all the way up through the supply chain.

The final report gave the first glance into a June real estate market as the NAHB/Wells Fargo HMI was released. The index saw a steep rebound, up 21 pts to 58 as sales and expected sales both increase at similar magnitudes. Readings are still off the pre-COVID-19 measures in the 70s but nonetheless resemble a rebound. The index of traffic of prospective buyers was especially strong as it more than doubled to 43, up from 21.

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