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July 24, 2023

The Sales Fall From Our Eyes - Flexport Weekly Economic Report

The Sales Fall From Our Eyes - Flexport Weekly Economic Report

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Phil Levy

Chief Economist, Flexport

July 24, 2023

The retail sales numbers for June were troubling. When smoothed and adjusted for inflation, they seemed to show a slowdown – if not an outright drop-off – across most sectors.

In Focus - Let's Get Real

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The just-released advanced estimates for U.S. retail sales in June don’t look so bad at first blush: June was up 0.2% from May and the April to May change was revised up from 0.3% to 0.5%. What’s not to like?

Almost everything else.

First, the initial June figure has an error band of 0.5%, so there’s little confidence this is an uptick. Second, there’s clearly a lot of monthly bouncing around. Third, while these numbers are adjusted for seasonal variation and holidays, they don’t take inflation into account – and as we continue to point out, we’re in an era when that matters.

So we set to work. Rather than looking at volatile monthly changes, we’ll take the latest three reported months as a quarter – April, May, June. We’ll compare that set with the three months that came before (January-March) and label that “Quarterly” – the dark bars in the graph. We’ll also compare our most recent quarter to the same quarter in 2022 (red, “Annual”). Then, we’ll make that inflation adjustment using the Consumer Price Index (CPI) series for “Commodities Less Food and Energy Commodities.” There are lots of different bundles that make up the CPI; this one should be reasonably close to our target of ‘goods being sold to the public.’

To see how inflation affects the results, the quarterly increase in the index was 1.3%, while the annual increase was 1.8%. These are large relative to the reported nominal changes in retail sales. Note also that the quarterly price index change equates to a 5.2% annualized inflation rate for goods.

The resulting picture looks grim. Whereas in recent times there was variation between good and bad sectors, this recent quarter varies from bad to worse, with few exceptions. Total retail was down 1.3% for the most recent quarter in real (i.e. inflation-adjusted) terms.

In the plus category, we have non-store retailers (heavily e-commerce), up 1.3% quarterly, and health and personal care, up 0.4% quarterly. Those were the only positive categories in the report, after inflation adjustment.

A sector like electronics, down 0.8% quarterly, might take some solace from conditions becoming less bad – that drop in the most recent quarter equates to a -3.0% annualized rate (note: numbers are affected by rounding). That’s less dire than the actual 5.4% drop.

But for every other sector in the report, the trend went in the other direction – the annualized quarter was worse than the past year.

The importance of this retail weakness is obvious for the sector. But it also can have implications for the logistics sector and the broader economy. For the logistics sector, slower retail sales can mean that excessive inventories are worked off more slowly, prolonging the current slump.

For the broader economy, second quarter U.S. GDP numbers will come out on July 27. Those are always reported in real terms. The consumer has been a principal driver of the rebound from the pandemic recession. The retail sales numbers cast doubt on the durability of that driver. For those pitching a cheerier vision of an economic soft landing, the proper response may be: “no sale.”

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Latest Flexport Metrics & Research

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).

We also held our monthly State of Trade webinar, which focused on the shipping industry.

This week, we will take a deeper look at recent moves in Flexport's Ocean Timeliness Indicator.

Economic Developments

China's economy grew 5.5% year-on-year in the first half of 2023. An 8.2% increase by the same measure in retail sales of consumer goods drove GDP growth. Industrial production also contributed, with the equipment manufacturing sector increasing by 6.5% and solar cells industry by 54.5%.

While U.S. industrial production declined by 0.5% in June for the second month in a row, production was still up 0.7% in Q2 compared to the same period last year. Within durable goods, a 3.0% month-on-month loss in motor vehicle manufacturing was offset by a 1.6% increase in aerospace and transportation equipment, as well as a 1.3% increase in computer and electronic products.

U.S. initial jobless claims for the week ending July 15 fell 3.8% from the week before to 228,000, the lowest reading in two months, reflecting a consistently tight labor market. This number is seasonally adjusted.

UK retail sales volumes rose 0.7% in June, marking the third month in a row of growth but still 1% lower than June 2022. The increase was led by a boost in non-food stores sales by 1.0% and food stores sales by 0.7%.

Inflation showed signs of easing in June in many advanced economies, with the notable exception of Japan.

  • UK headline inflation slowed down to an annual rate of 7.9% in June from an annual rate of 8.7% in May, recording the lowest rate since March 2022. Core inflation – which excludes energy, food, alcohol, and tobacco – also fell from an annualized 7.1% in May to 6.9% in June. While declining fuel prices drove rates down from their peaks, both headline and core inflation are still well-above the Bank of England’s target 2%.

  • Euro area headline inflation fell to an annualized 5.5% in June, down from 6.1% in May and 8.6% in June 2022. The fall in volatile energy prices led to the slowdown in headline inflation, but core inflation increased from the 5.3% reading in May to 5.5% in June, mainly due to rising services prices.

  • Canada headline inflation measured an annual rate of 2.8% in June, a decline from May’s reading of 3.4% and the lowest record since March 2021. Base-year effects in gasoline prices drove the slowdown, but they were offset by an annualized 8.3% increase in food prices and 30.1% rise in mortgage interest costs. The core trimmed-mean inflation, which the Bank of Canada watches closely, was higher than the headline in June at 3.7%, but still down from 3.8% in May.

  • Both Japan’s headline and core inflation (which takes out fresh food but not energy) rose from an annual rate of 3.2% in May to 3.3% in June, shifting in the opposite direction of other advanced economies. However, core-core inflation, which takes out fresh food and energy, went down from 4.3% in May to 4.2% in June. The Bank of Japan’s next monetary policy meeting is scheduled for July 27-28.

Japan’s exports rose 1.5% year-on-year in June, up from a reading of 0.6% in May and marking the 28th straight month of year-on-year increases in exports. Exports to Asia were down 8.4% by the same measure, but were up 11.7% to the US and 15% to the EU. A fall of 33.7% in semiconductor exports was offset by a 34.1% increase in car exports.

Political Developments

Russia withdrew from the Black Sea Initiative, which allowed Ukraine to ship grain and fertilizer from its ports on the Black Sea. A statement from Russia’s Foreign Ministry claimed that Ukraine had violated the agreement by selling products on commercial terms rather than providing them on a humanitarian basis. International leaders expressed concerns that the move would exacerbate food and energy price inflation.

Just days later, India announced a ban on non-basmati rice exports, citing rising domestic prices, which it said were up 11.5% year-on-year and 3.0% from the previous month. An export duty of 20% had been in place since last September. India is the world’s largest rice exporter and non-basmati rice accounts for around 25% of all exports. The ban is expected to contribute to food price inflation, particularly in Africa.

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.

About the Author

phil levy headshot
Phil Levy

Chief Economist, Flexport

July 24, 2023

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