Let Love Rule

JACKSON HOLE, Wyo. -- The

retail sales

and

producer price

reports released this morning each delivered an unambiguous message.

The retail sales report

told us that although sales did not match their first-quarter (and cycle-best) performance, they did top the (average) showings we've seen during the three strong sales years ended 1998.

Overall sales rose 7.9% during the second quarter. Compare that with 14.5% during the first and an average 5.3% since 1996.

Sales excluding autos rose 8.1% during the second quarter. Compare that with 13.2% during the first and an average 5.0% since 1996.

Sales excluding building materials, gasoline and autos (this series is used to produce the

personal consumption expenditure

numbers that show up in the

gross domestic product

report) rose 7.0% during the second quarter. Compare that with 12.4% during the first and an average 5.0% since 1996.

Consumption was still just plain strong when the third quarter began two weeks ago.

And consider this. Overall retail sales have grown an average 0.6% per month during the past year, and sales were growing at an 8.1% year-on-year rate when June ended.

Now, even if sales grow just 0.1% in both July and August and then only 0.4% in September, year-on-year growth will still accelerate to 8.7% two months hence.

The do-anything-to-keep-spending American consumers will not die.

They are terribly tough to kill.

The producer price indices

told us that price increases at the finished-goods level falter while increases further down the pipeline press on.

The core (excluding food and energy) finished goods index

decreased for the first time since January (and for only the second time since July 1998). Year-on-year growth here accelerated markedly between February 1998 and December 1998 -- it surged to 2.5% from 0.1% over that period -- but has since decelerated; it slowed to 1.5% as of last month (see our economic indicators

page for a chart).

The core intermediate goods index rose 0.5% in June (its biggest increase since April 1995) to produce a string of four straight increases for the first time since January 1997. This index bottomed at the beginning of the year.

The core crude goods index rose 0.5% in June following a 2.3% increase in May to produce its fastest quarterly increase in almost two years. This index bottomed in December 1998.

And keep in mind that the core price measures do not (by definition) include oil.

So.

Is the recent deceleration in the core finished goods index a head fake? Will the recent surge in pipeline prices put in back on an acceleration track within two months?

Or is it the core finished goods index that's telling the real story?

That's what market participants now have to decide.

No points for guessing how your narrator sides.

Side Dish

Best golden-ticket winner?

Charlie.

Veruca Salt.

Mike Teevee.

Augustus Gloop.

Violet Beauregarde.