Strong Retail Sales Coincide With Weakening Consumer Sentiment: Aug. 15, 2025

Stocks climbed in early trading after a retail sales report depicted American consumers kicking off the back half of the year in force. Indeed, recent hot services inflation numbers in the CPI and PPI earlier this week illustrated strong corporate pricing power helped by robust household shopping. The second consecutive month of consumption progress arrives as market participants are worried that employment conditions are slowing and in need of a rate cut or two. A more accommodative monetary policy would be beneficial to activity, but the economy may very well be reaccelerating without having received additional Fed easing as Wall Street and Main Street alike place tariff angst behind them. Still, price pressures are benign, and hiring is decelerating enough for the Fed to trim by 50 to 75 bps prior to Christmas. The morning equity rally is reversing, however, due to weaker-than-expected results from an industrial production print at 9:15 and UMich sentiment figures 45 minutes later. The greenback and bitcoin are also facing selling pressure while Treasuries and volatility protection instruments hover near their flatlines. The commodity complex is bullish across the board with all majors gaining ahead of a Trump-Putin meeting this afternoon in Alaska. Traders are additionally expressing interest in forecast contracts. 

Shoppers Were Busy in July

Retail sales posted another strong month in July as an uptick in relative certainty following Trump tariff concerns bolstered confidence and shopping activity. Additionally, appreciating stock prices, low unemployment and contained inflationary pressures are also supporting the American consumer and leading to a potential economic reacceleration in the back half of the year. Transactions rose 0.5% month over month (m/m), in line with the median estimate albeit slower than June’s 0.9% increase. Across the 13 major categories, 9 experienced gains and were led by revenues at automobile dealerships, furniture showrooms, sporting goods destinations, ecommerce, gasoline stations and clothing shops rising 1.6%, 1.4%, 0.8%, 0.8%, 0.7% and 0.7%. Progressing more modestly were food/beverage markets, health/personal care stores and general merchandise establishments, which climbed 0.5%, 0.4% and 0.4%. Conversely, miscellaneous store retailers, building materials suppliers, electronics/appliance sellers and restaurants/drinking parlors saw transactions retreat 1.7%, 1%, 0.6% and 0.4%.

Consumer Sentiment Weakens After Previous Gains

Consumer Sentiment declined for the first time in four months, according to the University of Michigan’s (UMich) gauge. The headline August score of 58.6 missed the median estimate of 62 and came in beneath the 61.7 for July. Both the indices for current conditions and expectations for the future dropped, falling from 68 and 57.7 to 60.9 and 57.2. Households lifted their projections for prices and unemployment, implying stronger cost pressures amidst lessening employment opportunities. Shoppers anticipate inflation over the next 1 and 5 years to be 4.9% and 3.9%, sharply higher than the 4.5% and 3.4% from the prior print.

Industrial Production Declines

Industrial production retreated slightly in July amidst broad-based sluggishness across mining, utilities and manufacturing. The categories saw production decline 0.4% and 0.2% month over month (m/m) while goods output was unchanged. The headline figure dropped 0.1% m/m, beneath the median estimate of 0% and June’s 0.4% gain. Among components, declines of 0.3%, 0.3% and 0.2% in nonindustrial supplies, materials and construction offset the strength in business equipment and consumer goods. The latter segments rose 0.5% and 0.1% m/m.

Trade Prices Signal Some Inflation

A surge in the costs for fuel imports alongside heavier goods charges drove some trade inflation last month according to the price index released by the Bureau of Labor Statistics this morning. Import inflation increased 0.4% m/m but fell 0.2% year over year (y/y) as the energy segment rose 2.7% m/m while slipping 12.1% y/y. The broader category which includes everything else climbed 0.3% and 0.9% during the period. In exports, costs grew 0.1% m/m and 2.2% y/y as the agricultural component was unchanged m/m but gained 3.4% y/y. Non-ag products advanced 0.1% m/m and 2% y/y, however.

Path To Reacceleration Remains Intact

This morning’s retail sales data was strong, pointing to an American consumer that remains on solid footing. As the tailwinds of the White House’s policy mix work their way throughout the economy alongside a few rate cuts by year-end, the economy is set to reaccelerate from here. Meanwhile, despite today’s sentiment data signaling cautious households, shoppers maintain heavy support from stock market momentum, subdued unemployment and tame price pressures. Furthermore, the worst is behind us in terms of tariff uncertainty, and folks are poised to breath a few sighs of relief as the economic expansion continues.

International Roundup

Japan’s GDP Growth Accelerates

Domestic demand appears to have helped Japan’s economy cushion the impact of tariffs with the country’s second-quarter gross domestic product climbing 0.3% quarter over quarter (q/q) and 1% y/y according to preliminary estimates. Both results accelerated from the 0.1% q/q and 0.6% y/y prints for the first quarter. Economists anticipated 0.1% in the q/q metric and only a 0.4% gain relative to the second quarter of 2024.

With the exception of front-running of purchases made earlier in the year to avoid higher levies, the second quarter is the first period to be influenced by new US tariffs that started in April. The US cross-border tax was initially set at 25% and then lowered to 15%.  External demand on a net basis, or exports minus imports, was up 0.3%, reversing from a 0.8% decline in the first quarter and narrowly beating the consensus estimate of 0.2%.

On a q/q basis, corporate investment grew 1.3%, exceeding the 0.5% consensus estimate and the first-quarter 1% increase. Private spending was also encouraging, climbing 0.2%, an unchanged rate from the prior three months and stronger than the 0.1% consensus estimate. In a related matter, Japan’s industrial production climbed 2.1% m/m in June after dropping 0.1% in May. The June result outpaced the consensus estimate for a print of 1.7%. During the same month, capacity utilization declined 1.8%. It increased 2% in May.

China Double Header Disappoints

China dished out a double header consisting for weaker than anticipated industrial production and retail sales for July. Industrial output climbed only 5.7% y/y, falling below the economist consensus estimate of 6% and June’s 6.8% gain. In the same month, retail sales grew only 3.7%, missing the 4.6% consensus estimate and falling below the 4.8% June increase. China also reported that its unemployment rate climbed from 5% to 5.2%, worse than the 5.1% estimate. Beijing has cracked down on price wars and a funding shortage temporarily dinged its fiscal stimulus program that provides consumer subsidies.

Hong GDP Growth Slows 

Hong Kong’s GDP growth decelerated in the second quarter with a 0.4% q/q gain, which met the economist consensus estimate but was slower than the 1.9% expansion during the first three months of the year. The April-to-June timespan produced a 3.1% y/y increase, driven by stronger exports and domestic consumption. It matched the economist consensus estimate and was slightly stronger than the 3% gain in the first quarter.