Retail Sales Surge but GDPNow Forecast Declined, What Happened?

by Mike Shedlock

The economic reports on Thursday were strong except for industrial production. GDPNow creator, Pat Higgins, explains the decline.

Please consider the GDPNow Nowcast for 2024 Q3.

Latest estimate: 2.4 percent — August 15, 2024

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2024 is 2.4 percent on August 15, down from 2.9 percent on August 8. After recent releases from the Treasury’s Bureau of the Fiscal Service, the US Census Bureau, the US Bureau of Labor Statistics, and the Federal Reserve Board of Governors, the nowcast of third-quarter real gross private domestic investment growth decreased from 2.8 percent to 0.0 percent.

Change in Private Inventories

Real Final Sales is the important number not the headline number. The difference is Change in Private Inventories (CIPI) which nets to zero over time.

I had expected a surge in the Nowcast based on retail sales and import-export prices. Import prices were only up 0.1 percent while export prices rose 0.7 prevent.

However, I had not looked at the Industrial Production report which was strongly negative.

Email Exchange with Pat Higgins, GDPNow Creator

I asked Higgins: Why the big negative change in CIPI?

Hi Mish,

It looks like the majority of the decline was due to the model’s forecast for motor vehicle and parts dealer inventories falling.  The industrial production variable for motor vehicle assemblies is one of the variables used within the model to make that forecast, and those assemblies fell a little more an 12 percent from June to July according to the IP report. 

The forecast for merchant wholesaler inventories also went down a bit; a few of the IP report variables are used in the vector autoregression model forecast for it as well.

Also the change in inventories for Q2 was revised up based on upward revisions to retail inventories in today’s release.  That accounted for something like 15% of the inventory contribution going down (if CIPI goes up last quarter, change in CIPI goes down this one).

Best regards,

Pat

Thanks Pat!

Retail Sales Surge In July from Smaller Negative Revision

Earlier today I noted Retail Sales Surge In July from Smaller Negative Revision

Advance retail sales rose 1.0 percent in July from a negative 0.2 revision led by autos. I’m skeptical because of how auto sales are counted.

Motor vehicle sales are counted when shipped from the manufacturer to the dealer no matter how long the cars sit on the lots. This grossly distorts auto sales.

Industrial Production

Also on Thursday, I noted Industrial Production Declines 0.6 Percent on Top of Big Negative Revisions

Synopsis

• Motor vehicle assemblies are down 12+ percent.
• Motor vehicles and parts sales are up 3.6 percent after falling 3.4 percent last month.
• Retail sales surged a full percentage point.
• Import prices were only up 0.1 percent while export prices rose 0.7 prevent.

GDPNow Percentage Point Contribution Change

• PCE Goods: +0.22 PP, Retail Sales Report (Addition to Real Final Sales)
• PCE Services: -0.21 PP, Industrial Production Report (Subtraction from Real Final Sales)
• Net Import/Exports: +0.05 PP, Import-Export Prices (Addition to Real Final Sales)
• Gross Private Domestic Investment: -0.50 PP (Hit to top line)

The net result was Industrial Production + Retail Sales netted to zero in terms of Real Final Sales and that’s the important bottom line number.

I had not looked at Industrial Production when I tweeted that I expected a rise in GDPNow from Thursday’s economic reports.

Meanwhile, it appears that auto sales are simultaneously very weak and very strong, something that only a random number generator could concoct.

Based on Higgins’ comments, it appears we may have a small upward adjustment to the top line of GDP Q2 in the next revision. That is in isolation and assumes no other changes.

Estimating Further Negative Revisions to GDI For the First Quarter

On August 9, I did a post Estimating Further Negative Revisions to GDI For the First Quarter

The BEA’s initial GDI growth estimate for the first quarter was 1.5 percent, later revised to 1.2 percent. I expect further negative revisions. Here’s a “What if” take.

Looking ahead, I expect negative revisions to the retail sales numbers, and economic reports in general.