Friday's report of better than expected US July unemployment fueled speculation that the US economy is nearing the end of recession. On Thursday, August 13th, the US Commerce Department will release the July retail sales report. Two thirds of US domestic GDP growth is generated by consumer spending. The monthly retail sales report helps to forecast the direction and strength of consumer spending. The July retail sales report will be a key gauge to whether US consumer spending is rebounding and how strong a recovery the US economy might experience. Over the past several months as the recession deepened the US savings rate rose sharply. The US savings rate hit its highest level in 15 years rising to 6.9% in June. US consumers are continuing to struggle with managing their personal balance sheets, debt burden and worries about potential loss of employment. The rising savings rate may translate into weaker consumer spending, limit a sustained improvement in retail sales and foreshadow a weak US recovery.

US retail sales rose by a more than expected 0.6% in June. The consensus estimate for the June retail sales report was to increase by 0.4%. May retail sales were left unchanged at 0.5%. Ex. autos June retail sales fell for the fourth consecutive month declining by 0.2%. The rise in June retail sales was driven by a surge in gas prices and stronger demand for automobiles. The June retail sales rise was only the fourth monthly rise in retail sales in over a year. Consumer spending has been chilled by rising unemployment and declining wealth effect of falling equity markets and home prices. The July retail sales report is expected to rise 0.5% and rise 0.1% ex. autos. As was the case in the June report, rising gas prices will largely be the reason for the rise in July retail sales. In addition, the government cash for clunkers plan has fueled a sharp increase in auto sales. The rise in auto sales may also be reflected in the July retail sales report.

The impact of July retail sales report is difficult to forecast because the USD has rallied supported by better than expected US July unemployment report. For most of the year the USD traded inversely to the direction of equity markets and economic data with weaker USD emerging after the release of positive economic data. A stronger than expected July retail sales report will be a good test to gauge whether the correlation between USD price direction and equity/risk sentiment is continuing to breakdown. There is a major debate emerging in FX markets over whether USD price direction will focus on improving US economic fundamentals or risk sentiment.

 width=480

Figure 1: US retail sales average quarterly % change
Source: US Department of Commerce/Federal Reserve Bank of New York