INDICATOR: June Retail Sales

KEY DATA: Sales: +0.5%; Ex-Vehicles: +0.4%; Ex-Vehicles and Gasoline: +0.3%

IN A NUTSHELL: “The consumer spent heavily in the spring and that implies second quarter growth should be quite strong.”

WHAT IT MEANS: Wages might not be rising very quickly but that is not stopping households from spending money. Retail sales rose solidly in June after surging in May. The May level was revised upward sharply, so the two months together point to really good demand. Looking at the June report, vehicle demand led the way, which we pretty much knew from the sales data. But there was another strong month of sales at building materials and garden stores, as homeowners seem to be improving their properties. And while they are doing that, they are going out to eat like crazy once again. Restaurants had been seeing modest sales gains for quite a while by that seems to be changing. People shopped online and bought lots of furniture and health care products, indicating that sales were spread between big-ticket and smaller purchases. Rising gasoline sales also helped. Declines in purchases at supermarkets, sporting goods stores and department stores restrained the gains. It should be kept in mind that these data are not price adjusted, so some of the ups and downs may be due to price changes.

In a different report, the New York Fed’s Empire State Index, which measures local manufacturing activity, declined slightly in early July, but it remained at a very high level. Almost every component of the current conditions and futures indices was down, but not significantly. Essentially, manufacturing in the New York region remains solid. Of course, this area is not a huge industrial area, so not much should be made of the changes, on way or another.

MARKETS AND FED POLICY IMPLICATIONS: The first reading of second quarter GDP growth will be released on July 27^th and right now it looks to be a really good one. It would not be surprising if it had a 4-handle, which would mean that the economy expanded by about 3% during the first half of the year. That is pretty much in line with expectations. The robust growth is also not a surprise given the massive tax cut and the beginnings of additional government spending. When you implement one of the largest fiscal stimulus’s on record, you better get strong growth at least for a while. Which means we should see solid growth, at a minimum, for the rest of the year. But, as I keep asking, what happens when the sugar high wears off? Will businesses keep investing at higher rates or settle back into previous capital spending levels? Right now, they are not shopping for new equipment ‘till they drop by any means. And once the tax cuts increase consumer spending to a higher level, how can households increase their spending levels without any significant change in purchasing power? It is great that 2018 should be a great year, but what about going forward? That is always the worry when you hype things and it is no different right now. For example, after the Obama stimulus package hit, growth accelerated. In the second quarter of 2010, it hit 3.9%, but faded afterward. With inflation heating up and wages not following, with businesses spending lots of money on mergers and acquisitions, stock buy backs and dividends but little on new capital, and with trade becoming a major uncertainty, it is not a lock that strong growth will be sustained.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.