Retail and Non-Farm: Which Better Reflects the State of the U.S. Economy?

The results of U.S. retail sales and non-farm reports are contradictory, leading to divergent judgments in the market regarding the true state of the economy. Federal Reserve Chairman Jerome Powell will speak in Wyoming on Friday, and the market is closely watching his latest statements on the economic situation.

Analysts point out that consumer spending, primarily driven by high-income groups, may mask potential weaknesses in the economy, while the resilience of household balance sheets allows consumers to maintain normal spending levels despite a slowdown in job growth.

Consumption and Employment Data Release Contradictory Signals

According to an earlier article, the July retail sales report shows that U.S. consumer spending remains resilient. Although previous June data indicated weak sales in import-dependent categories such as furniture and electronics, the July report showed a rebound in furniture sales, while electronics sales continued to decline. Even after adjusting for inflation, retail sales still grew at an annual rate of about 2%.

Data from Bank of America shows that debit and credit card spending grew nearly 2% in July, marking the fastest growth since January of this year. This private data corroborates the stability of consumer spending with official retail sales data.

However, non-farm employment data presents a starkly different trend, with July non-farm payrolls adding only 73,000 jobs, far below expectations, marking the lowest record in nine months, and the previous two months' data was significantly revised down by 258,000.

The continued decline in job growth contrasts sharply with stable consumer spending, raising doubts about the true state of the economic fundamentals.

Four Explanatory Frameworks Analyze Data Divergence

Market analysts propose four possible frameworks to explain the divergence between consumption and employment data.

First, the decline in employment may reflect a reduction in worker supply rather than weak underlying demand, and thus may not be reflected in consumer spending.

Second, consumer spending is increasingly driven by the wealthiest consumer groups, and sales data may underestimate the economic weakness reflected in the employment report. Bank of America's credit and debit card spending data segmented by income level supports this view.

The third perspective suggests that household balance sheets remain strong, allowing families to continue normal spending even as economic and job growth slows. The New York Fed's second-quarter household debt and credit report shows that delinquency rates across various loan types and age groups are declining, with student loans being a significant exception.

The fourth viewpoint posits that consumption will eventually slow to match employment trends. Oliver Allen from Pantheon Macroeconomics states that a weak labor market and rising prices for tariff-related goods mean that real income is essentially flat, making further weakness inevitable