US Macro: Retail sales see broadbased surge… – May retail sales jumped 17.7% mom, far above our (5.0%) and consensus (8.4%) forecasts, and this came despite an upward revision to the April numbers. The strength is particularly unexpected considering other indicators of consumption – notably the Redbook weekly retail sales – have been surprisingly depressed, keeping the NY Fed’s weekly economic index pegged at low levels. The rebound leaves retail sales just 1.4% below year-ago levels, and 3.2% below pre-pandemic February levels. At the low point in April, sales were 17.2% below February levels, so this is a remarkably rapid improvement. The improvement was concentrated in non-grocery store sales (which have fallen back following the panic-buying period in March), with particularly strong gains in clothing, electronics, homeware, and autos. Restaurants & bars also showed a strong improvement following reopenings in many states, although consumption here is still down 39.4% yoy.
…but the manufacturing sector saw a much smaller improvement – Meanwhile industrial production improved by less than expected in May, rising only 1.4% mom, following a downwardly revised -12.5% in April. Manufacturing grew at a stronger 3.8% pace, with the overall index dragged down by weakness in the oil & gas sector following the dramatic decline in oil prices. Manufacturing is likely to see a much bigger improvement in June, with the big three automakers having restarted production in mid-May, and Boeing slowing ramping up production of aircraft (including of the 737-MAX, which has also now resumed). Beyond this initial bounce, manufacturing is likely to be much less affected by social distancing rules than the services sector, but it will significantly depend on how consumption evolves over the coming months.
Bottom line: Rebound is rapid, but will soon reach limits – While an initial, dramatic snapback in consumption was always to be expected as lockdowns were eased, the key question is how far this rebound can go, and when we will return to trend levels of activity. Our view is that this will take considerable time given that social distancing rules will likely continue to limit capacity, particularly in the hospitality sector, and even by end 2021 we expect GDP to still be 5pp below trend. Today’s data suggests a quicker initial snapback, but it says nothing about what will happen beyond that. Meanwhile, there is still a puzzling discrepancy between the pace of improvement suggested by higher frequency data and consumer confidence measures (much more gradual), and the monthly retail sales, and this underlines the uncertainty around macroeconomic data in these exceptional times. With the pandemic far from over, we still see risks to our forecasts as tilted to the downside.