Positive news for freight demand as retail and manufacturing advance
Economic data from the goods side of the economy continued to trend in a positive direction in June, as both retail sales and industrial production posted solid gains. Retail continues to be a bright spot in the freight economy, while manufacturing looks to gather some momentum after a dismal start to 2019.
The Census Bureau reported that total retail sales rose 0.4 percent in June from May’s levels after a downwardly-revised 0.4 percent increase in the previous month. This beat consensus estimates of a 0.1 percent gain and marks the fourth consecutive monthly increase in the retail sector. Year-over-year growth in total retail sales rose to 3.4 percent in June, up from 2.9 percent in the previous month.
For the second straight month, growth in the retail sector was generally broad-based, as sales in 11 of the 13 major industries in the sector saw higher sales in June. An impressive 1.7 percent gain in sales at nonstore (mostly online) retailers topped all industries in June, driving year-over-year growth up to 13.4 percent. Electronics and appliance stores and gasoline stations were the only two industries with falling sales in June, with the latter affected by falling gas prices in the economy. Core retail sales, which exclude auto and gasoline purchases, rose by an impressive 0.7 percent in June with year-over-year growth rising to 3.4 percent.
Retail continues to be a consistent source of strength in the freight economy, particularly as it relates to trucking and parcel demand. Most of the goods movements between warehouses and retail locations occurs by either truckload, less-than-truckload or parcel shipments, and after a brief early year lull, retail trends have clearly turned upward throughout the second quarter. Year-over-year growth has still clearly shifted into lower gear after impressive growth in the second and third quarters of 2018, but remains generally solid, hovering around 3-3.5 percent.
Factory output improves, led by the first gain in manufacturing of 2019
In the industrial sector, total production was unchanged in June from May’s levels, falling slightly short of consensus estimates of a 0.1 percent gain. Year-over year growth slipped to 1.3 percent as a result, down from 2.1 percent in the previous month.
Industrial output in June was hampered by a 3.8 percent decline in utility production, more than reversing the decline in utilities from the previous month helped by a surge in utility production, which rose 2.1 percent in May. Manufacturing industrial production, which excludes mining and utility production from the total, rose by 0.4 percent. This marks the second consecutive gain in manufacturing output after declining in each of the first four months of the year, though difficult comparisons to last year pushed yearly growth down to 0.4 percent.
As was the case in May, there was still plenty of weakness in manufacturing in June despite the healthy overall gain. Nearly half of the gain during the month was driven by a jump in auto production, which rose 2.6 percent from May’s levels. Nearly one-third of the major industries in the sector reporting declining output. This included sizeable drops in machinery, furniture and electrical equipment manufacturing. This would suggest that the manufacturing sector still hasn’t completely turned the corner despite the gains in May and June
Behind the numbers
On the retail side, June’s results reinforce the view that some of the weakness early in the year was just a temporary hiccup. Fundamentals for consumer spending – hiring, income growth, consumer confidence, credit conditions and inflation – are all conducive to solid growth going forward, and as long as these supporting conditions exist, overall retail activity should be fine. Consumer spending on goods was one of the areas of weakness in the first quarter GDP results, but it should be one of the few sources of strength when second quarter numbers are released later this month.
Oddly enough, this improvement in retail sales has not translated into any improved hiring in the sector. Employment figures from the Bureau of Labor Statistics show that retail employment has declined in each of the past four months even as hiring in the overall economy has continued at a respectable pace. This just serves as a reminder that even though retail performance is holding up well, the sector itself is still in the process of transforming as online shopping continues to displace traditional brick and mortar retail outlets. This has structural implications for freight activity in the economy, as e-commerce channels often involve a drastically different logistics setup.
For the manufacturing sector, the back to back gains in output are certainly a welcomed sign after some early year concerns that manufacturing was on the verge of a far more severe decline. Still, it is worth noting that the combined gains in May and June were not enough to offset April’s decline in manufacturing. Manufacturing production has declined outright in both the first and the second quarter, which is the first time that has occurred since the start of 2016. Right now, manufacturing production is about equal to where it was at this point last year, and it is unlikely that year-over-year growth makes any significant improvement over the next couple of months.
Ibrahiim Bayaan is FreightWaves’ Chief Economist. He writes regularly on all aspects of the economy and provides context with original research and analytics on freight market trends. Never miss his commentary by subscribing.