Retail sales didn't slow as much as expected in August, but pressures — including higher gas prices and a resumption of student loan payments — are starting to build on consumers. More trouble for the U.S. economy could also be ahead with the United Auto Workers apparently set to strike when its contract with Ford, General Motors and Stellantis expires at midnight Thursday. After the early release of retail sales data, the S&P 500 opened solidly higher in Thursday's stock market action.
The S&P 500 has been knocked off stride by a surge in the 10-year Treasury yield over the past two months as Federal Reserve policymakers worry about persistent economic strength. Although hiring and wage growth have clearly moderated, they haven't yet showed any sign of rolling over.
Initial claims for jobless benefits in the week through Sept. 9 edged up 3,000 to 220,000, but the four-week average of claims slid by 5,000 to 224,500, the lowest since February.
Yet the U.S. economy could be at a turning point. Fat savings accounts built up early in the pandemic are now largely spent. Pent-up demand for goods is satisfied. And discretionary spending is under new pressure from both gas prices and student loan repayments. But the slowdown ahead could be much more abrupt if the UAW snares auto production. A further significant risk comes from a potential government shutdown at month's end.
Meanwhile, there was good news on the inflation front on Thursday as producer price index data showed healthcare services prices up just 0.1% on the month. The PPI data for health care feeds directly into the Fed's primary inflation gauge, the PCE price index.
Retail Sales
August retail sales rose 0.6%, both overall and excluding autos. Wall Street expected an increase of 0.2% overall and 0.4% minus autos.
However, the better-than-expected rise in August came after a significant downward revision in July's strong numbers, with the overall gain trimmed to 0.5% from 0.7%. Excluding autos, sales rose 0.7% in July, revised down from 1% growth.
Excluding August's 5.2% rise in spending at gas stations on the back of climbing gasoline prices, retail sales rose a modest 0.2%, down from 0.5% in July.
Reaction Of S&P 500, Treasury Yields
After the retail sales and jobless claims data, the S&P 500 rose 0.4% in morning stock market action. The 10-year Treasury yield dipped one basis point to 4.24%.
On Wednesday, the S&P 500 edged up 0.1%, despite a bigger-than-expected rise in the core consumer price index in August. Strength in service prices is keeping another Fed rate hike in play for later this year, but that won't happen at next week's meeting. While a hike on Nov. 1 remains a realistic possibility, the coming hits to the economy should rule that out.
The S&P 500 closed 0.3% below its 50-day moving average on Wednesday, according to MarketSmith. That loss of support will act as a yellow flag for the current stock market rally until the S&P 500 can convincingly reclaim that level.
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Retail Sales Details
In his Jackson Hole, Wyo., speech last month, Fed chair Jerome Powell had cited recent strength in recent sales as one of the factors keeping further rate hikes on the table. However, the details of August's report don't show much oomph.
Sales at restaurants and bars rose 0.3% in August, while July's gain was revised down to 0.8% from the 1.4% gain first reported. Online sales were flat after a 1.5% gain in July amid Amazon Prime Day.
Sales at building materials, garden supply and home improvement stores edged up 0.1%, while July's gain was revised to just 0.2% from 0.7%.
Apparel store sales jumped 0.9%, but were up just 1.3% from a year ago.
UAW Strike Imminent
UAW leaders say they're seeking an immediate 20% pay hike, with 5% increases in subsequent years, and are prepared to stage a strike when their contract expires at midnight. The strike will be strategically designed to cause the most pain to profits and biggest hit to production with the fewest workers involved. That would help extend the life of the UAW's $825-million strike fund.
A 10-day strike could cost the auto industry, including suppliers, $5 billion, Michigan-based Anderson Economic Group estimates. Goldman Sachs estimates that the strike will cut GDP growth by 0.05%-0.1% for each week it lasts.
The cost of a government shutdown could be twice as high, about 0.2% of GDP for each week, Goldman estimates.
On top of that, Goldman sees a 0.5% hit to GDP growth in Q4 from a resumption of payments on $1.7 trillion worth of federal student loans. The first payments are due in October, after a moratorium dating back to April 2020. But Treasury data show that payments have already picked up. That could tap the brakes on consumer spending, which has been enabled by households reducing their savings to just 3.5% of discretionary income, less than half the rate that prevailed before the pandemic.
After the Supreme Court killed President Biden's student loan forgiveness plan, the Education Department announced a Plan B. A new repayment plan limits liability to 10% of income above $33,000 in annual earnings, or about a $15 hourly wage. That would save many borrowers $1,000 per year.
