The U.S. monthly core retail sales for August 2020 disappointed. The market expected an increase of 1%, and instead got only 0.7%. In such cases, the blame often goes to the estimated data or the expectations. If the expected value is unrealistic, then it is easy for the actual to differ from the forecast. For this reason, it is always best to interpret the actual data based on the previous release.
If we do this, the news is even worse, for two separate reasons. First, the previous data was revised lower. Second, the 0.7% increase is almost half the previous data growth of 1.3%. Therefore, the core retail sales are slowing and that is never a good sign for an economy, especially an economy that is in a recovery mode.
What to Make of the U.S. August Retail Sales Data?
The biggest problem is that retail sales data shows the health of the American consumer. This is critical to economic recovery, and a decline in spending means only two things, both having negative implications.
One is that the consumer has no money available to spend. We can imagine that after the fiscal stimulus ended in the United States, many people find themselves in a tough spot making ends meet as unemployment still affects millions.
Another is that the savings rate might increase. This partially offsets the first argument, but it poses a real threat to the monetary policy set by the Fed. As the Fed engaged in monetary easing to stimulate the economy, a higher savings rate means little or no velocity of money. Hence, if the money does not move, the economy will have a hard time outperforming.
Still on the Fed, it delivered an interesting message at yesterday’s FOMC Meeting and at the press conference that follows. During the press conference, Fed’s Powell reiterated multiple times that the U.S. economy is likely to need more stimulus in the form of direct checks sent to the population. While not clearly stated, it felt like the Fed’s projections for the period ahead already incorporated future stimulus from the U.S. Congress.
This is not something difficult to imagine considering the pandemic is still alive and kicking. Hence, recovery on the consumer spending is expected in the months to come, with the retail sales data to be the first one to confirm it.