U.S. Economics – Growth

Intro

Our view has been that economic growth would fail to hit recessionary levels, and inflation was more likely to accelerate on a rate of change basis through September, pushing out expectations for rate cuts further. We saw the first sequential acceleration in y/y CPI growth last week and a decline in the number of rate cuts expected by September, but for this post we will take a closer look at the growth data released this week. Retail sales fell 0.9% m/m in May, following a 0.1% decline, while industrial production dropped 0.2% m/m after gaining 0.1% in April. On a y/y basis, retail sales and industrial decelerated to 3.3% and 0.6%, respectively. The headline retail sales weakness was largely driven by tariff-related pull forward dynamics for autos, while underlying consumer spending momentum remained somewhat intact as evidenced by the control group m/m pace of 0.4%. Headline industrial production showed divergent trends with the highly volatile electric and gas utilities sector down 2.9% m/m while durable manufacturing was up 0.4%, driven by a 7.7% increase in auto production. These crosscurrents suggest an economy experiencing sector-specific adjustments as people and businesses navigate fiscal policy uncertainty and heightened geopolitical tension rather than fundamental, broad-based weakness that would lead the FOMC to begin cutting rates sooner than the market currently expects.

Growth

The Signals:

• • Retail Sales (Chart 1)
    • Total retail sales fell 0.9% m/m from -0.1% in April, reaching the largest decline since January.
      • Motor vehicle and parts sales declined 3.5% m/m, gasoline stations fell 2.0% m/m, and building materials dropped 2.7% m/m.
      • The control group rose 0.4% m/m from -0.1% in April, with miscellaneous stores up 2.9% m/m, sporting goods up 1.3% m/m, and clothing up 0.8% m/m.
    • On a y/y basis, retail sales grew by 3.3%, down from 5.0% in the prior month, but the control group and non-store retailers remained elevated at 5.0% and 8.3%, respectively.
  • Industrial Production (Chart 2)
    • Total industrial production fell 0.2% m/m from 0.1% in April.
      • Manufacturing output rose 0.1% m/m from -0.5% in April, driven by a 7.7% increase in autos.
      • Manufacturing excluding motor vehicles fell 0.3% m/m, utilities declined 2.9% m/m, and mining gained 0.1% m/m.
    • On a y/y basis, industrial production slowed to 0.6% from 1.4%.
  • Fed Funds Futures (Chart 3)
    • The number of 25-basis point rate cuts priced in for September has declined from 1.0 to 0.7.
      • October has also declined, but expectations for one 25-basis point rate cut remain.
      • Between today and the December 2025 FOMC meeting, the market expects two 25-basis point rate cuts, though that measure has also declined from 2.2 to 1.8 in recent days.

The Takeaway:

• The latest round of growth data does not suggest we have entered an economic environment indicative of recession or the onset of multiple FOMC rate cuts.

Visuals:

(Chart 1)

Source: Macrobond

(Chart 2)

Source: Macrobond

(Chart 3)

Source: Bloomberg

Market Trends:

Source: Macrobond

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.