Retail Sales and Food Services Increase

Retail sales and food services rose by 1.0% in July, despite a downward revision of June’s figures, which now show a 0.2% contraction. The July increase was partly driven by a 3.6% rebound in motor vehicle and parts dealers' sales, following a dip in June caused by a software hack affecting car dealerships. However, the gains were widespread, with notable increases in sectors such as furniture, electronics, building materials, general merchandise, and nonstore retailers. Control group retail sales, which exclude food service, auto, building supplies, and gas station sales, were up 0.3%, following a strong 0.9% gain in June.

Inflation Continues to Decline

The Consumer Price Index (CPI) rose by 0.2% in July and is now up 2.9% compared to a year ago, marking the lowest annual inflation rate since March 2021. Core CPI, which excludes food and energy, also increased by 0.2% over the month, bringing the annual rate to 3.2%. A key factor in this decline was a 2.3% drop in used vehicle prices, although shelter prices saw a slight rebound with rent and owners’ equivalent rent rising 0.5% and 0.4% respectively.

The Producer Price Index (PPI) increased by 0.1% in July, bringing the year-over-year comparison down to 2.2%. Core PPI, which excludes food, energy, and trade services, saw a 0.3% monthly rise and is up 3.3% compared to a year earlier.

Industrial Production and Housing Starts Decline

Industrial production, which measures output in the manufacturing, utility, and mining sectors, fell by 0.6% in July, with manufacturing activity dropping by 0.3%. Housing starts also declined by 6.8% to a seasonally adjusted annualized rate (SAAR) of 1.2 million, the lowest level since the onset of the pandemic. Single-family starts were down 14.1%, while multifamily starts rose by 14.5%. The decline in single-family starts is likely weather-related, especially in the South, where Hurricane Beryl had a significant impact.

Housing Market Sentiment Drops

The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index fell by 2 points to 39 in August. The index for current single-family sales dropped to 44, while the index for sales expectations in the next six months increased slightly to 49. The traffic of prospective buyers also declined, signaling ongoing challenges in the housing market.

Forecast Impact

The better-than-expected retail sales figures help ease concerns about a potential economic slowdown, despite weaker labor reports in July. The solid performance of control group retail sales suggests that consumer spending will likely remain robust in the third quarter. Meanwhile, the latest CPI and PPI data provide further evidence that inflation is easing toward the Federal Reserve’s 2% target. Although shelter costs rose slightly, we expect this category to decelerate over time as new lease measures show cooling trends. Given this backdrop, we anticipate a 25-basis point interest rate cut in September, barring any significant changes in the labor market.



The sharp decline in single-family housing starts in July is likely due to weather-related disruptions, particularly in the South. However, we continue to expect a slight slowing trend in single-family starts for the remainder of the year, in line with previous permit activity and increasing inventories of unsold new homes.

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