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US Consumers Singing, "Ain't No Stoppin' Us Now!
"Ain't No Stoppin' Us Now" is a 1979 disco song performed by R&B duo McFadden & Whitehead. American consumers agree. For a long time now, their doubters warned that a low savings rate, flatlining real disposable income, rising consumer debt, and mounting affordability challenges would force households to retrench. Instead, they continue to do what they do best, namely shop! A well-balanced labor market and the wealthiest retiring generation ever continue to power consumer spending. Let's review the latest upbeat developments: (1) Retail Sales. Retail sales (including food services) rose 0.2% m/m in June after a 1.0% gain in May (chart). The slowdown largely reflected a 5.3% drop in gasoline station sales as pump prices fell by roughly 50 cents per gallon. Excluding gasoline but including food services, sales increased a solid 0.7%, with gains across the board. Nonstore retail sales jumped 1.9%, the largest monthly increase in a year, likely boosted by Amazon's Prime Day. Encouragingly, control group sales, a key input into GDP goods spending, rose by 0.5%. For Q2 as a whole, control-group sales advanced at a remarkable 9.2% annualized rate. Several sales categories rose to new record highs in June, including discretionary areas such as motor vehicles, electronic shopping, and general merchandise (chart). Food services, the only services category in the report, also climbed to a record high. Meanwhile, the solid gain in core retail sales (excluding food services and building materials) suggests the June PCE report should show a solid increase in goods spending (chart). Online retailers' share of GAFO sales has climbed to nearly 50% (chart). The strong retail sales report came as no surprise, as Redbook same-store sales remained strong in June (chart). They slowed to 8.2% in the week ended July 10, but that's still a solid increase. Spending might cool in July as the World Cup ends. (2) Labor market. The labor market remains in very good shape. Initial jobless claims fell to a 10-week low of 208,000 in the week ended July 10, while continuing claims eased to 1.81 million. Together, the data suggest layoffs remain very low. (3) Regional business surveys. Manufacturing activity is picking up nicely. The average of the New York and Philadelphia Fed manufacturing indexes jumped to 28.5 in July, the highest since 2022, suggesting another gain in the national ISM manufacturing index this month (chart). The averages of the prices-paid and prices-received indexes in the two surveys moderated in July but remained elevated (chart). (4) Small business owners survey. Job openings and hiring plans among small businesses improved in June. The share of owners reporting unfilled positions rose to 32%, while a net 11% plan to create new jobs (chart). Meanwhile, 51% cited a lack of qualified applicants, supporting our view that the labor market continues to face a skills mismatch. The percent of small business owners raising selling prices rose to 38% in June, the highest reading since January 2023, and 32% are planning to do so (chart). Only 17% of small business owners planned to raise worker compensation over the next three months, matching the lowest reading since July 2025. This supports our view that there's no wage-price spiral during the current inflationary oil shock, as there was in 2021 and 2022 (chart). (5) GDPNow. The Weekly Economic Index combines 10 high frequency economic indicators. Its latest reading is consistent with real GDP growth of around 2.6% y/y (chart). The Atlanta Fed's GDPNow tracking model currently shows Q2 real GDP growth at 1.7% (saar) (chart). Much of the weakness reflects a surge in AI-related imports, with net exports expected to subtract 96 basis points from growth. By contrast, consumer spending is projected to rise a solid 2.5% (saar), up from 0.5% in Q1, while final sales to private domestic purchasers is expected to increase 3.4%, up from 1.7%.
On Oil, Financials & Quantum IPOs
Oil industry assets are being destroyed left and right in Russia and the Middle East, the casualties of two ongoing wars. As a result, the world is using more oil than it’s producing, and the Strategic Petroleum Reserve has been depleted to levels nearing the minimum needed for its pumps to work. Jackie examines associated ramifications, ironies, and the pipeline projects being undertaken as an alternative to shipping oil. … Also: Banks, brokers, and asset managers have been reporting stellar second quarters. … And: A look at the leap in quantum-computing-related IPOs—and US government initiatives to accelerate development of quantum technologies.
Too Much Complacency?
Our Roaring 2020s thesis holds that the demand side of real GDP remains supported by resilient consumer spending and robust business investment. On the supply side, tech-led productivity is boosting real GDP, while keeping a lid on inflation. Now that the economy has proven its mettle over the first seven years of the decade, it should continue to do so over the remaining three years of the Roaring 2020s. While our Roaring 2020s thesis has been a contrarian view for much of this decade, it is increasingly accepted. We are in good company. Both US Treasury Secretary Scott Bessent and Fed Chair Kevin Warsh are vocal proponents of the productivity-led economy story. Investors have been increasingly betting on it, as evidenced by record-high stock prices and stable bond yields. We are comfortable with the financial markets embracing the Roaring 2020s narrative. However, as optimism becomes consensus, rising complacency can leave markets vulnerable if overlooked risks become more visible. One example of such complacency may be in the crude oil market. Despite renewed attacks on shipping by Iran and the resumption of the shooting war between the US and Iran, the price of a barrel of Brent crude remains relatively subdued at around $85 currently (chart). Alternative routes for exporting oil that avoid the Strait of Hormuz have helped keep prices relatively contained. So has weak Chinese demand. However, the oil market may be underestimating the risk of a prolonged war, especially if it continues into the winter months with depleted oil inventories. This week's batch of cooler-than-expected PPI and CPI inflation numbers for June certainly calmed concerns on that front. As a result, the likelihood of an imminent Fed rate hike has become less likely, with the federal funds rate futures market now moving toward one rather than two such moves over the next 12 months (chart). The recent increase in the 10-year US Treasury yield was attributable to the 10-year TIPS yield, signaling better productivity-led growth. The spread between the two narrowed, suggesting a moderation in inflation expectations (chart). (1) Sentiment. Signs of complacency are not limited to financial markets. Sentiment indicators tell a similar story, with Polymarket.com showing only a 10% probability of a US recession this year (chart). Our favorite Bull/Bear Ratio rose to 3.12 last week, well above its historical average, suggesting that investor optimism has become increasingly widespread and may be approaching excessively bullish territory in the near term (chart). Furthermore, June's BofA Global Fund Manager Survey shows investors increasingly anticipate a Roaring 2020s outcome, with an AI-driven productivity growth boom and no Fed tightening. A record percentage of respondents expect a "no landing" global economy, and their cash levels are extremely low. All that triggered BofA's contrarian sell signal, The buying of US equities by foreign investors tended to be a contrarian indicator in the past. They loaded up on US stocks near the tail end of the previous three bull markets (chart). Be warned: Over the past 12 months, they purchased a record-busting $903.8 billion! (2) Inflation. Yesterday's CPI report gave investors some reasons to be complacent about inflation. So did today's PPI report. The PPI total final demand fell by 0.3% m/m in June, driven mostly by a 6.4% decline in energy (chart). Excluding food and energy, it rose just 0.2%. On the other hand, the core PPI final demand for personal consumption rose 4.8% y/y in June, its highest since late 2022 (chart). The June PPI report confirms that price pressures remain in the pipeline. Core PCED excluding shelter rose to 3.5% y/y in May. Both suggest that the subdued 2.1% y/y increase in June's core CPI excluding shelter might be misleading. To be or not to be complacent? Here is something else to worry about: The New York Fed's Global Supply Chain Pressure Index continues to exhibit a tight correlation with CPI goods inflation (chart). With supply-chain pressures remaining elevated in June, goods inflation is likely to remain firm in the near term. (3) Employment. We've been expecting the labor market to improve after it was depressed by severe winter weather in January and February. Sure enough, ADP weekly payroll gains turned higher in March and April (chart). They remained solid in May but have trended lower since then through June. Then again, we called the bottom in employment-related stocks, which are still rebounding (chart). (4) China. Looking overseas, China's real GDP rose 4.3% y/y during Q2-2026, the slowest growth rate since the lockdown-impacted final quarter of 2022. That happened despite another record high in China's exports during June (chart). The export boom reflects China's growing economic imbalance. Industrial production continues to outpace retail sales by a wide margin, forcing producers to rely increasingly on export markets to absorb excess capacity (chart). As a result, Chinese goods continue to flood global markets, fueling trade tensions and concerns that China is exporting deflation.
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