Consumers were still spending in June
Retail sales rose 1.1 percent in June reversing May's drop. The monthly jigsaw pattern over the past several months can be attributed to fluctuations in vehicle sales, which rose in June after declining in May. Excluding motor vehicles, retail sales rose 0.4 percent in June, also reversing the previous month's drop. Among nonauto retail sales, the sharp variation has come from rising/falling gasoline prices. When gasoline prices rise, they boost gas station sales, but when they fall, they cause a drop in gas station sales (although there may not be a corresponding change in volume).

The chart below shows the quarterly growth rates for total retail sales, nonauto retail sales, and nonauto, nongas retail sales. From third-quarter 2000 through first-quarter 2001 the variation in these three series was minor; thus looking only at the headline number allowed us to generalize about retail spending. However, variations have widened in the past four quarters. For instance, a surge in auto sales in the fourth quarter boosted total spending much more than the non-auto sector. In first-quarter 2002 it appeared that consumers had returned to the mall with a vengeance. But a closer look showed that the bulk of the acceleration came from rising gasoline prices. In the second quarter it appears that retail sales posted a modest gain. In fact, declining gas prices put downward pressure on total spending. The nonauto, nongas measurement of retail sales shows much better results than the other two -- the best results since the first quarter of 2000.

The University of Michigan's consumer sentiment index for mid-July fell to 86.5 from 92.4 for all of June. This was the lowest level since last November. Many analysts believe that consumer confidence predicts consumer spending. On the whole this is true; long term trends show that retail sales growth and the consumer confidence measures (either the Conference Board or the University of Michigan) move in the same direction. However, it is important to keep in mind that a drop in confidence doesn't always lead to a monthly drop in retail sales.

The chart above compares monthly percent changes in retail sales to the level of the University of Michigan's consumer sentiment index. Notice that retail sales went back and forth month-after-month even when the level of confidence was high and rising. The low point of confidence following Sept. 11 matches up with the high point in retail sales, when automakers introduced 0-percent financing. It is important to place the confidence measures in perspective and not automatically assume that retail sales are going to collapse this summer.

Consumer installment credit expanded $9.5 billion dollars in May after increasing $8.6 billion in April. The bulk of the rise came from nonrevolving credit - reflecting continued growth in lending for autos and trucks. May's auto sales were not particularly robust, but credit applications often get "bunched up" from the previous month. Perhaps more interesting is the sharp upward trend over the past six months. Consumers spend more - on credit - when they feel comfortable with their financial conditions. But they also repay their credit cars more slowly when conditions are poor. At economic turning points it is generally difficult to distinguish between the two because we don't know how much of the change in credit was due to extensions of new debt or a slowing in the repayment of old. Given the recent improvement in consumer spending, perhaps consumers are feeling better about their financial conditions or they wouldn't be spending so much at the mall. Keep in mind that the consumer credit data is lagged one month behind retail sales and two months behind the consumer sentiment figures; that's why the data are telling slightly different versions of the story.

Producer prices remain subdued
The producer price index rose 0.1 percent in June after declining in the two previous months. Energy prices were flat but food prices inched up 0.1 percent for the month. This put the total PPI 2.1 percent lower than a year ago. Excluding the volatile food and energy price components, the PPI increased 0.2 percent in June, the largest monthly gain since last December. Household appliances and cosmetics posted the largest gains over the month. Most price hikes were modest among the various consumer and capital goods categories and a few even recorded declines.

The more interesting story now lies in the earlier stages of processing for the producer price index. Steel import sanctions did lead to significant price hikes for various steel components at the crude and intermediate goods level. But according to Labor Department officials, it is too soon to tell how much, if any, these increases will factor into the finished goods index. In the meantime, the nonfood, nonenergy crude materials index jumped 1.6 percent in June, continuing the trend of the past several months. While the steel import sanctions have played a role in the higher prices here, price hikes for crude materials also reflect increasing demand from manufacturing and production. The intermediate goods index (excluding food and energy prices) inched up 0.2 percent, a modest amount and in line with the past few months. Overall, the intermediate goods index is still down relative to a year ago, although crude materials prices (nonfood, nonenergy) are up 6.2 percent from last June. As we noted in the July 10 Short Take article, price increases at the crude materials level usually are associated with stronger production, not accelerating finished goods prices.