Economic indicators provide insight into the overall health and performance of an economy. They are essential tools for policymakers, advisors, investors, and businesses because they allow them to make informed decisions regarding business strategies and financial markets. In the week ending on July 18, the SPDR S&P 500 ETF Trust (SPY) fell 0.69%. The Invesco S&P 500 Equal Weight ETF (RSP) was up 1.48%.
In this article, we look at three indicators from the past week: retail sales, industrial production, and the Conference Board’s Leading Economic Index (LEI). At first, these indicators might seem unrelated. However, they all have a role in predicting economic trends. Retail sales and industrial production are among the “big four” recession-determining indicators recognized by the National Bureau of Economic Research (NBER). Additionally, the LEI serves as a forward-looking indicator. It offers insights into whether the economy is headed toward expansion or recession. There have been many conversations regarding a potential recession over the past few years, though one has yet to materialize. These indicators, among others, will remain an important part of the ongoing discussion.
Retail Sales
American consumer spending was unchanged last month. But a closer look at the underlying data points to strong and resilient shoppers. Retail sales were flat in June, higher than the anticipated 0.3% decline in consumer spending. Consumer spending dropped significantly at gas stations (-3.0%) and for motor vehicles and parts (-2.0%). Meanwhile, almost all other sectors showed a pickup in consumer spending. That was led by nonstore retailers (1.9%) and building materials (1.4%).
Core retail sales (excluding automobiles) were up 0.4% from May, exceeding the expected 0.1% growth. Lastly, control purchases, which is thought to be an even more “core” view of retail sales, were up 0.9% from May. That surpassed the expected 0.2% growth. This series typically does not garner as much attention as the headline and core figures. But control purchases are a more consistent and reliable reading of the economy because. That’s because it strips out many volatile components.
Overall, the data provided a good balance to the Fed’s monetary policy decisions. The latest retail sales data showed the economy is not headed toward a sharp slowdown as well as kept a September rate cut as a realistic probability.
Retail sales will have an impact on the interest in the SPDR S&P Retail ETF (XRT), VanEck Retail ETF (RTH), Amplify Online Retail ETF (IBUY), and ProShares Online Retail ETF (ONLN).
Industrial Production
U.S. factory output increased to its highest level in over five years last month. Industrial production rose 0.6% in June, outpacing the 0.3% projected growth. A breakdown of the index reveals that last month’s growth can be largely attributed to the utilities sector. That sector grew 2.8% from the previous month. Compared to one year ago, industrial production was up 1.58%. That marks the highest year-over-year growth since November 2022.
Capacity utilization, which measures the amount of slack in the economy by comparing current production output to its maximum potential output, also increased last month. The latest reading of the capacity utilization index was up 0.6% from May to 78.8%. That surpassed the 78.5% forecast. In addition to showing cycles of economic growth and demand, capacity utilization also serves as a leading indicator of inflation. That makes it a closely watched measure of economic health.
Industrial production will have an impact on the interest in the Industrial Select Sector SPDR Fund (XLI).
Leading Economic Index
The Conference Board Leading Economic Index (LEI), a composite index designed to predict the economy’s trajectory, fell further last month. However, it was the smallest contraction in the past four months. In June, the LEI fell 0.2% to 101.1 — remaining at its lowest level since April 2020. The index has now declined or been flat for 28 straight months. With that said, the Conference Board noted the smaller monthly rate of decline suggests the index’s long-term growth has become less negative and now points to a slow recovery.
A breakdown of the latest report showed that four of the index’s 10 components made negative contributions. Those include consumer expectations for business conditions, new orders, interest rate spread, and initial unemployment claims. While the LEI signaled a recession for all of last year, it has recently switched off the recession signal. But the Conference Board still believes economic growth will slow later this year as a result of decreased consumer spending.
Economic Indicators and the Week Ahead
The upcoming week will offer insights into the nation’s economic health and activity, with the release of the initial estimate for Q2 GDP and June’s PCE price index data, better known as the Fed’s preferred measure of inflation.
Current estimates show that the U.S. economy grew at a rate of 2.0% in the second quarter, a pickup from 1.4% in the first quarter. Meanwhile, headline and core PCE have slowly trended downward toward the Fed’s 2% target rate over the past few years, with the latest readings both at 2.6%.
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