Retail sales expanded in July a seasonally adjusted 0.7% to $336.5 billion from the previous month, the Department of Commerce said today. These numbers appear consistent with indicators that consumer spending is growing, but at a more moderate pace than the first quarter.

See Consumers Get Thrifty as Manufacturing Accelerates.

However, this rise does offset June’s 0.5% loss, which was revised upwards from a 1.1% decline. Consumer spending consists of two-thirds of the economy.

The increase was driven primarily by an upsurge in car sales as dealers piled on incentives to clear out ’04 inventories to make room for new models. Car sales were brisk in July, as motor vehicle & part dealer sales jumped 2.4% to $78.2 billion. Excluding motor vehicles and parts, retail sales grew a more modest 0.2%.

More shoppers crowded department stores as well, as general merchandise stores saw a 1% gain in revenues to $42.1 billion. Consumers also spent more at grocery stores, as food and beverage stores posted a modest 0.1% increase to $44.0 billion.

Building material and garden equipment retailers saw a 1.1% decline in sales to $30.4 billion. Consumers spent less at gas stations as they posted a 0.52% decrease to $26.0 billion. Clothing stores posted a miniscule decrease of 0.09% to $15.7 billion.

Chris Brady, president of Commercial Motor Vehicle Consulting (CMVC), said that while the report indicates strength in the consumer base, it also underscores that economic growth may moderate through the next quarter. “It’s [retail sales growth] a strong number,” Brady said. “It [the figures] says right now the probability of a sustained downturn in consumer spending is relatively low.”

However, Brady wouldn’t expect any large spike in consumer spending in the coming months either. “I don’t think there’s going to be strong growth in consumer spending. The most likely forecast is moderate growth,” Brady said.

This is because recent reports indicate that the economy has been slow to add jobs lately. See Unemployment Stagnated in July. With fewer jobs being added, there would be a diminished growth in consumer spending, Brady explained. “The driving force behind personal income is employment growth. Indicators show the future will see modest growth in personal income that will drive moderate growth in sales.”

Satish Jindel, president of SJ Consulting, points out that capital spending, or business investments in assets and equipment, have played a large role in not only consumer spending, but also job creation. This applies especially to small businesses that qualify for generous tax incentives. “Capital expenditures are high for businesses,” Jindel said. “If I were to invest in ten computers, Uncle Sam will pay for all of it. Therefore, I would be more apt to invest in equipment before adding another person onto the payroll.”

Manufacturing Buzzing

The latest data from the Bureau of Labor Statistics confirms that the manufacturing segment was not only expanding, but was leaner and meaner than ever.

For the second quarter, preliminary estimate indicate that productivity shot up 7.5%. By comparison, productivity expanded 2.9% in the nonfarm business sector.

The pulse of the manufacturing sector correlates to the strength of the trucking industry, as it indicates movement in the supply chain.

Within the manufacturing industry, durable goods manufacturing productivity gained 5.7%, while nondurable goods manufacturing leapt 10.7%.

Jindel attributes this increase in part to increasing efficiencies in freight planning. “It’s the whole advancement in the supply chain industry, and the quality of work. They [the industry] are squeezing inefficiencies out of their operations,” Jindel said.

Additionally, since the sector has shed nearly three million jobs since January 2000, the industry has restructured to be more competitive globally. “In the radius of the last three years they [the manufacturing industry] did some squeezing and downsizing and the companies found that they had certain components that were not needed and therefore not added back during the recovery,” Jindel said.

CMVC’s Brady cites manufacturing working nearly at capacity as a catalyst for dramatic productivity gains. “When they [the sector] produce more, you see a cyclical increase in productivity,” Brady explained.

However, mounting backlogs has pushed the industry to hire more, despite dramatic efficiency improvements. “Manufacturing output has hit a level where that it can’t increase output solely based on productivity to increase higher volumes,” Brady explained. “It’s a good sign that manufacturers are confident enough to hire workers because it doesn’t make sense to hire and let workers go if there’s a downturn shortly after.”

Last week the Department of Labor reported an advance estimate that the manufacturing sector added 10,000 more jobs in July. Since January, industry has added 91,000 jobs.

Interest Rates Advanced

On Tueday, the Federal Reserve Board initiated another quarter-point rate hike for federal funds to 1.5%. The Fed underscored its confidence in underlying economic expansion in spite of the slowing labor market.

“Even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity,” stated the Federal Open Market Committee.

Brady takes the Fed rate hike as a vote for economic growth to continue. “It’s a good sign that they [the Fed] feel comfortable— they feel that the economy has enough momentum to overcome issues like slowing job growth and higher fuel costs,” Brady said.

Trucking Still Looking Good

Based on indicators of slow and steady increases in job and consumer spending, lean inventories, and mounting backorders, the trucking industry remains poised to be lucrative for the remainder of the year, Brady said.

“The scary scenario for the trucking industry would be a slowdown in consumer spending and inventory buildups,” Brady said. “The key is that if inventories remain in balance, trucking is in good shape. If it gets excessive, there’d be a downturn in freight volume. Right now consumer spending has to be above that of retailer sales plans. I think that wholesalers and retailers plans are relatively conservative and that’s why [store] stocks seem relatively lean.”

And despite the recent slowdown in economic growth, there remains growth nonetheless, which dispels a lot of concern for a spending decline or ballooning inventories for now. “For fleets, the outlook is probably more positive than most other industries in the U.S.,” Brady said.