Third-quarter GDP got off to a weak start, thanks to more signs that the consumer has begun to reign in spending.
Retail sales for July were unchanged, 0.2% better than analysts were expecting. Excluding autos and falling gasoline prices, retail sales were up slightly last month, but still below the six-month average of a 0.5% gain.
Retail sales may well be the most important economic report these days, because consumer spending is about the only thing holding up the economy. And because consumer spending makes up about two-thirds of GDP, the third quarter likely got off to a flat to negative start. Two quarters of negative GDP is the classic definition of a recession.
The third quarter got off to by far the worst start this year. January and April had huge gains in retail sales – about 1.5% each – that almost single-handedly kept the economy growing. With August sales starting out weaker than expected, third quarter GDP may hinge on September retail sales.
What retail sales really need is a big rally in the stock market. What do January and April have in common? In both months, stocks posted strong gains, the only strong months for the stock market this year. In every other month, retail sales were anemic.
It is amazing how much consumer sentiment has become directly linked to the performance of the stock market, probably like no other period in history. Which may make the stock market the most important economic indicator of all – and in more direct a way than anyone ever thought imaginable. Rather than predicting an economic recovery or recession, stock market rallies or sell-offs may now be directly producing economic effects.
Which means that what third-quarter GDP really needs is a strong rally in the stock market sometime in the next month.