A barrage of data on Thursday offered a mixed view of the U.S. economy in the face of rapid inflation, including more muted retail activity and a still buoyant labor market.
Retail sales indicated that spending on goods, while far from collapsing, is moderating. And jobless claims fell for the fifth consecutive week, suggesting that demand for workers remains healthy. Several manufacturing reports, including a modest gain in factory production, were also mixed.
The data illustrates the many economic cross-currents the Federal Reserve is navigating as it attempts a soft landing for the economy while pressing the brakes harder on monetary policy to stamp out the fastest inflation in a generation.
Policymakers are almost certain to raise interest rates another 75 basis points next week after government data earlier this week showed consumer prices accelerating more than expected.
The retail sales report showed that while households are breathing a sigh of relief over falling prices at the gas pump, widespread inflation is limiting Americans’ ability to spend on discretionary items. Total sales rose 0.3%, although the numbers are not adjusted for price changes.
So-called control group sales that exclude food services, gasoline, building materials and automobiles – used to calculate gross domestic product – stagnated in August and the previous month’s gain was half that initially announcement.
Still, the report suggests consumer spending is far from collapsing as eight of 13 retail categories rose. Additionally, the data showed a rebound in restaurant revenue, which may suggest that spending on services remains strong.
A healthy labor market helps explain much of the resilience of demand. Initial jobless claims fell by 5,000 to 213,000 in the week ended Sept. 10, according to the Labor Department. The four-week moving average, which dampens week-to-week volatility, fell to its lowest level since June.
Unemployment claims have fallen as employers continue to try to fill millions of job vacancies and retain the workers they already have. Strong labor demand is fueling firmer wage growth and fueling inflationary pressures, which is why the Fed is trying to calm it down.
Meanwhile, the Fed’s industrial production report showed industrial production rose slightly in August as resilience in business investment more than offset a decline in consumer goods production.
While domestic demand generally holds up, manufacturers face a number of headwinds, including a shift in consumer behavior towards services and away from goods. This shift in preferences caught some retailers off guard, leading to excess inventory and canceled orders that further strain production.
Foreign demand is likely to weaken as an energy crisis grips Europe, the Chinese economy cools and a surge in the value of the dollar raises the cost of American goods for overseas customers.
A pair of Fed Bank regional surveys on Thursday showed mixed results. A manufacturing gauge in New York state rebounded in September on firmer orders and shipments after plunging the previous month. Meanwhile, the Philadelphia Fed gauge contracted for the third time in four months.
“With the collapse of global manufacturing due to the double whammy of zero-Covid lockdowns in China and soaring energy prices in Europe, we expect any further gains in US manufacturing output to coming months will also be mitigated,” Paul Ashworth, chief North American economist at Capital Economics, said in a note.
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