Modest gains in retail sales
Retail sales edged up 0.3 percent in August after a 0.2 percent increase in July. As seen in the chart below the pace of retail sales growth is quite anemic, but the gains of the past two months show a slight improvement from May and June. Excluding the volatile auto group, retail sales rose 0.5 percent in August after remaining unchanged in July. Retail sales rose at electronic & appliance stores, building materials stores, food stores, gas stations, sporting goods stores and general merchandise stores. The gain is modest, but positive.

It is possible that some of the improvement in retail sales in August stemmed from the tax rebate checks that were beginning to be posted in late July. But it is likely that the positive influence coming from the tax rebate will be spread over several months and not easily measured in August or even September.

Many economists are suggesting that the terrorist attack on the World Trade Center and the Pentagon will impact consumer confidence and therefore retail sales. It is likely to have an impact in the short run - mainly September retail spending - as most people sit glued to their television sets. But it is still debatable whether consumers will stop spending altogether as we get into the fall and holiday season. As many actions have already shown, Americans aren't easily cowed.

In any case, it is worth noting that the University of Michigan's consumer sentiment index for mid-September fell sharply in the first half of the month and suggests that perhaps consumers were already in a downshifting mode.

Consumer installment credit for July showed no change for the month after declining $1.8 billion in June. Consumers may be paying down bills and not taking on much additional debt. With slower motor vehicle sales in August, consumer installment credit may not show much growth next month either.

Production continues downward slide
The index of industrial production fell 0.8 percent in August after dipping only 0.1 percent in July. While all product sectors posted declines, the largest was for business equipment (-1.6 percent). Production of consumer goods fell 0.8 percent and production of construction supplies decreased 0.5 percent. Manufacturing production declined 1 percent in August, worse than the overall total since production of utilities gained 1.6 percent during the month.

The orders figures we have seen for the month of July along with the NAPM survey for August suggest that industrial production is not likely to turn around quickly. However, plans to improve intelligence operations in the United States may have some high tech industries growing in the near term. Also, a rebuilding of the World Trade Center towers, or similar construction, should help activity in New York City area.

Inflation in check outside energy
The producer price index rose 0.4 percent in August after dropping 0.9 percent in July. This was due primarily to a 1.1 percent spurt in energy prices, which turned around again after declining nearly 6 percent in July. Excluding food and energy prices, the PPI edged down 0.1 percent during the month. On a year-over-year basis, the total PPI increased to 2.1 percent, but still shows a favorable downward trend. Excluding food and energy prices, the PPI is 1.3 percent higher than a year ago, showing further improvement relative to the past couple of months.

In addition to the favorable news on the finished goods report, prices decreased at earlier stages of processing with declines in both the intermediate and crude materials price indexes. This suggests that inflationary pressures are not building in the pipeline. Other inflation news reported earlier in the week was also favorable as import and export prices continue to show larger year-over-year declines.