U.S. advanced retail sales in July were even stronger than they first appeared when corrected for deflation. But that apparent aggregate strength conceals widely varying performance across sub-categories.

In Focus - Sales Divergence

The Census Bureau’s report on advance retail sales for July described surprising strength, with sales climbing 0.7% over the June level and 3.2% above July 2022.

The report is not easy to interpret. First, the numbers are nominal – i.e. not adjusted for inflation. Second, they’re volatile. Third, there are a lot of subcomponents in that aggregate number, from cars to grocery stores and gas stations to women’s clothing.

The most difficult of the challenges is probably adjusting for inflation. A familiar inflation gauge, like the core CPI Index, is relatively smooth, but it has a very large services component. That’s not particularly relevant if we’re talking about the sales of goods. Instead, we use a sub-component of the CPI called “Commodities Less Food and Energy Commodities” as a deflator for this week’s chart. It’s more focused than core CPI, but also a lot more volatile.

Lest this seem like a lot of esoteric fussing, Core CPI rose by 0.2% in both June and July. The Core Commodities measure, in contrast, showed 0.1% deflation in June and 0.3% deflation in July. Using that deflator, the reported headline retail sales increase was a 1.0% rise in real terms.

To handle volatility, the chart normalizes real retail sales for each category to the start of 2021 and shows how the monthly retail sales numbers jump around. One can see a general downward trend for electronics (red), for example – it ends at 93.1, down 6.9% from its January 2021 level. But over that time period, there were some dramatic monthly jumps.

Given that, July showed some rare consistency. If we rank the six categories in the chart by their 30-month performance, the ranking is the same as the July monthly performance.

Leading the pack was the non-store retailer category (solid black line), which notably includes online sellers. It was up 13.1% over the entire period and 2.2% for July.

The clothing category (dotted line) comes next, up 9.7% for the entire period and 1.4% for July. However, this largely illustrates the importance of picking a base period. Clothing sales surged to up 16.9% in June 2021 and have thus shown a significant net decline in the subsequent two years.

Health and personal care (green line) also surged and then sank, ending up 4.5% for the entire period and 1.1% in July. But the last 17 months have been more impressive, as sales rose from down 5.0% in February 2022.

Electronics and building materials are both shorthand for broader categories: “Electronics & Appliance Stores” and “Building Material & Garden Equipment & Supplies Dealers.” And they have both decreased, though not as dramatically as the last category, Furniture, which is down 17.6% from January 2021 and fell 1.4% for July.

One candidate explanation for this drop in home-related retail sales: according to the National Association of Realtors, existing home sales in the U.S. fell from roughly 6.5m at the start of the graph to 4.2m (seasonally adjusted, annual rate) in June 2023, a drop of more than 35%.

The upshot is that there is no single story for how retail sales have performed. Each sector has its own story and instead of coming together, we’ve seen performance diverge.

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Latest Flexport Metrics & Research

This week we look at some of the implications of our latest forecast for U.S. consumer goods imports, which now extends to the end of the year.

This past week we released updates to our Post-Covid Indicator (PCI), Trade Activity Forecast (TAF), Flexport Consumption Forecast (FCF), and Trade Price Forecast (TPF).

Economic Developments

Q2 Euro area real GDP expanded 0.3% quarter-on-quarter, accelerating from flat growth in Q1. Real GDP was higher by 0.6% than in Q2 of 2022. Germany, the Euro area’s largest economy, avoided contracting for a third straight quarter but didn’t expand. Italy’s GDP shrank by 0.3%, however.

Euro area economic sentiment index improved 6.7 points from July, reaching a reading of minus 5.5, the highest it’s been in four months. The current economic situation indicator also increased by 2.4 points.

U.S. initial jobless claims fell 11,000 week-on-week to 239,000, after a revised increase of 23,000 in the previous week. Compared to the same period last year, jobless claims were up by 26,000.

July inflation readings showed headline inflation falling but core measures stayed flat or ticked upwards.

• UK headline inflation fell to an annualized rate of 6.8% in July, down from 7.9% in June and the lowest since February 2022. The slowdown was attributed to a month-on-month decrease of 25.2% in gas prices. Core inflation, which excludes food, energy, alcohol and tobacco, remained at an annual rate of 6.9% from June to July, well above the BoE’s target of 2%. Food and non-alcoholic beverages continue to drive inflation, but the rate of increase of their prices declined to 14.8% from 17.3%.

• Euro area headline inflation slowed to an annual rate of 5.3% in July from 5.5% in June. A decrease of 6.1% in energy prices was offset by an increase of 10.8% in prices of food, alcohol and tobacco. Core inflation, which strips out energy, food, alcohol and tobacco, stayed the same at 5.5%. Growth in prices of non-energy industrial goods fell to 5% from 5.5%.

• Japan’s headline inflation was 3.3% in July, unchanged from June. Japan’s core inflation, which only takes out fresh food, fell to 3.1% from 3.3%, while core-core inflation, which also excludes energy, ticked up to 4.3% from 4.2%. Durable goods price increases slowed to 3.2% from 5.8%.

Trade numbers from the previous week saw major year-on-year declines in Asia exports, although autos exports continue to see healthy numbers.

• Japanese goods exports declined 0.2% month-on-month in July and 0.3% year-on-year. Autos exports were 28.2% higher year-on-year, but exports of semiconductors and semiconductor machinery fell 14.8% and 26.6%, respectively. Exports to the U.S., Japan’s biggest exports market, rose 13.5%, driven by a 9.1% increase in autos exports.

• Euro area goods exports to the rest of the world grew 0.3% year-on-year, and total exports during the first half of 2023 were 3.2% higher than during the same period in 2022. Extra-EU exports also rose 0.4% YoY, and total exports in 2023 through June were up 3.9% from 2022. A 7.1% YoY decrease in food and drink exports from the EU was offset by a 14.5% increase in machinery and vehicles exports.

• Singapore non-oil re-exports fell 10.7% year-on-year in July, after a 13.8% decrease in June. The biggest contractions were seen in electrical machinery exports, which shrank by 28.8%, and specialized machinery exports, which were down 24.5%. Singapore is one of the world’s busiest ports and is a key transshipment hub for inter-Asia and Intra-ASEAN trade of intermediate and finished goods.

• India’s goods exports in July were down 15.9% compared to the same month last year. Exports of goods, excluding petroleum, gems, and jewelry, fell 5.7% year-on-year, while exports of ready-made garments, one of India’s biggest exports, was 17.4% lower than July 2022.

Political Developments

U.S. treasury yields closed at 4.30% on Thursday, a 16-year high. The CBO’s baseline projections in its Budget and Economic Outlook are based on interest rates that are about 75 basis points below current average interest rates. If rates remain this high, the CBO predicts an additional $2.3 trillion in federal government debt over the next ten years.

Disclaimer: The contents of this report are made available for informational purposes only and should not be relied upon for any legal, business, or financial decisions. Flexport does not guarantee, represent, or warrant any of the contents of this report because they are based on our current beliefs, expectations, and assumptions, about which there can be no assurance due to various anticipated and unanticipated events that may occur. This report has been prepared to the best of our knowledge and research; however, the information presented herein may not reflect the most current regulatory or industry developments. Neither Flexport nor its advisors or affiliates shall be liable for any losses that arise in any way due to the reliance on the contents contained in this report.