Manufacturing production was unchanged in July after declining for nine consecutive months. July retail sales were also steady. Excluding the 4.2% price drop for gasoline, spending rose a strong 0.3%. June inventories fell 0.4%, absorbing much of the remaining inventory surplus.
Consumers continue to increase spending enough to more than offset the lower spending for capital equipment. Consumer spending will be boosted during the next few months by cheap gasoline prices and the federal tax rebates. Capital goods spending is likely to weaken further over the rest of the year but by well less than the increase in consumer spending. Capital goods were clearly the weakest sector in both the inventory and production reports. Electronics and computers also continue to weaken. Production fell 2.4% in July. Sales are now rising, but production will not pick up for several months until more of the huge inventory surplus is used up or discarded.
August is probably the second month of the economic recover period. Typically, the first five or six months of a recovery show slow increases with some reverses before enough industries are expanding to assure stronger and steadier gains. Be prepared for a substantial downward revision of the 0.7% growth in second quarter GDP, because the GDP accountants assumed a stronger June than is now reported. April-June growth will probably be revised to near 0%, possibly into negative territory. Then GDP growth in the summer quarter should be well over 1%.