August Market Commentary from Vanguard & Co.
Consumers didn’t shop much this summer, as weak retail sales revealed. But business inventory levels remained steady. Meanwhile, industrial production has strengthened thanks to improvements in manufacturing. Automakers were key to the pickup.
For the week ended August 15, 2014, the S&P 500 Index was up 1.2% to 1,955 (for a year-to-date total return—including price change plus dividends—of about 7.1%). The yield of the 10-year U.S. Treasury note fell 10 basis points for the week to 2.34% (for a year-to-date decrease of 70 basis points).
Retail sales flatten
Retail sales for July were unchanged from a month earlier. Analysts had expected a 0.3% gain. There was a slight increase in sales among drug, apparel, and food and beverage stores. However, those gains were largely overshadowed by declines in department stores, other general merchandisers, and auto dealers. Motor vehicle purchases slipped in July, but are up 6.0% year over year, as dealers have benefited from easier access to credit and growing demand. As a whole, retail sales sagged after a brisk spring, when consumers rushed to the stores to fulfill pent-up demand following an unusually harsh winter. Sales were up 3.7% from a year ago, the slowest increase since February.
Business inventories inch up
Business inventories increased 0.4% in June, in line with analysts’ expectations. Inventory levels rose 0.5% for retailers and 0.3% for both manufacturers and wholesalers. The inventory-to-sales ratio, which represents how long it would take for inventories to clear shelves, wasn’t greatly affected by the weakness in retail sales. In fact, it remained unchanged at 1.29 from May. Business inventories are up 5.8% from June 2013.
Wholesale prices up slightly
The Producer Price Index (PPI), a measure of wholesale prices and a leading indicator of consumer inflation, rose 0.1% in July, down from 0.4% in June. A 0.6% drop in energy prices—the largest since November—kept wholesale prices down. Energy prices had jumped 2.1% in June, largely driven by rising oil prices. All the price gains in July came from the services category; goods prices were mostly unchanged. Core PPI, which excludes the more volatile food and energy prices, increased 0.2%. On a year-over-year basis, PPI increased 0.2%.
Manufacturing better than expected
Industrial production, which captures the output of factories, mines, and utilities, advanced 0.4% in July, better than expected. Manufacturing increased by 1.0%, the most since February. Motor vehicle and parts makers accounted for much of the improvement with a 10.1% surge in production. A shorter retooling period this summer helped automakers revamp production sooner. Excluding autos, production rose 0.4%. Mining output ticked up 0.3%. Utilities posted the biggest decline (–3.4%) as a mild summer has dampened demand for air conditioning. Capacity utilization, which is measured across industries, increased to 79.2% in July, a rate 1.7 percentage points above its level of a year earlier and 0.9 percentage point below its long-run (1972–2013) average.
