Online spending picked up. Big-box discounters also did extremely well, which reflects an improvement in entry-level wages and the push by discounters to compete with online behemoths. Walmart is now taking on Amazon, offering same-day delivery. The casualties remain traditional department stores, mostly in malls, where traffic has plummeted. Store closures and retail layoffs continued in May.
The most encouraging swing in May was the jump in spending at restaurants, which is discretionary. Restaurants were hit earlier in the year by everything from the government shutdown to the polar vortex. Core retail sales, which go into the actual calculation of consumer spending for GDP purposes also increased 0.5% in May, excluding vehicles, parts and gasoline station sales.
Separately, industrial production rose 0.4% in May after losing ground in April. Utilities led those gains as air conditioners were turned on again in the South. Manufacturing was weaker, growing at half that pace in May after contracting during the first four months of the year. A large overhang of inventories, a slowdown in growth abroad and tariffs have contributed to the weakness we have seen this year in the manufacturing sector.
Bottom LineStronger consumer spending and a modest rebound in manufacturing activity suggests that we are finally draining inventories, which have been built up over the last three quarters. The offset is that it suggests imports are rising, which will infuriate trade hawks in the administration. Real GDP is still tracking at less than 2% in the second quarter. GDP in the second half of the year will depend heavily on whether we can shed tariffs and see a rebound in growth abroad.
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