Chuck Lieberman, Partner and CIO at Advisors Capital Management, joined Closing Bell to break down why he thinks the July retail sales report was a good sign for the economy, as lower gas prices affected the month-to-month change.

Closing Bell

July Retail Sales Flat, But May Not Tell the Full Story

Welcome back to cheddar news, disclosing bell everyone. I'm kristen Schouler down here on the floor of the stock exchange and stocks pulling back a bit today after some disappointing economic data showing retail sales were flat last month as inflation continues to weigh on american households and while americans have shown resilience in the face of higher prices, they're still spend, they're increasingly turning away from discretionary items that were once popular like clothes, electronics and furniture and moving more toward necessities like groceries. So joining me now is chuck, Lieberman partner and Chief Investment Officer advisors. Capital Management chuck. Thanks for coming on the show. What's your takeaway from this report? I actually have a positive view of the report. There were a couple of pieces that were quite weak gasoline sales and we know that that occurred because of lower gasoline prices. So that doesn't disturb me at all. And the other piece that was weak was auto sales embedded in the auto data is used car sales as well as new car sales and I'm sure used car sales were down a lot because new car sales, we know we're up. So the data are actually a lot better than they appear and especially when adjusted for inflation. So what does this tell you about the health of the consumer and their ability to continue spending going forward because let's say even if we did avoid a recession in the first half of the year as the administration continues to claim alongside the Fed chair, we still perhaps have challenges ahead of us. Oh, we have a big challenge. We clearly have an inflation problem, but the economy is not part of the problem right now? In terms of growth? If you look at the employment reports, they have been spectacular. A strong employment report would be 200,000 jobs. We had over 500,000 last month. So there's a real disconnect between the GDP data which suggests the decline in activity and hiring and most other data. Uh I my sense of it is the economy is actually motoring along and that's precisely why there is an inflation problem. Demand is very strong relative to supply. So of course, we saw walmart have better than expected earnings yesterday chuck in the retail space. We have a whole host of retail companies reporting earnings toward the tail end of the second quarter reporting season this very week. Target had a disappointing report this morning, trying to offload excess inventory versus very steep discounts. What's your reaction to targets report? It's disappointing. We own target, we think it's great value. We think the company will manage itself very well, but you're exactly right kristen and the comments that you made earlier right on target, there's a very divergent behavior at the consumer level. Some items are out. Others are now getting a lot of emphasis the parts of the consumer that did very well earlier during the pandemic. Those are very soft and then there's a little more emphasis on staples and necessities because of inflation Now, in terms of what targets report might tell us about the retail space. Do you think it's indicative or more of an outlier chuck of what's going on within the broader retail category? Well there's a whole bunch of categories for which target is very, very symptomatic. So in in terms of discretionary spending for clothing, it's a bit on the soft side, they've got a lot of inventory, they've got to dump it and that's what they're trying to do. And walmart said the same thing in terms of food products, necessities, those parts of the business are doing better. And again, target is symptomatic of what's happening across the industry. So the reality is that the first six months of the year are in the rear view mirror. Now the Fed, the biden administration continuing to claim as we mentioned earlier chuck, that we didn't have a recession in the first six months of this year. What do these next six months hold the rest of the year? These next 4.5 months, 5.5 months as we make our way toward december. Well, you know, they gave me a crystal ball when I got my PhD in economics but it's not very clear, it's pretty foggy. So for the next six months I think it's very, very unlikely we're going to see a recession. Unfortunately, I think inflation is going to come down only slowly it is going to come down. There are two components to inflation, a transitory component and a more fundamental component and the transitory component will come out of the data and that's great. Everyone will cheer about that piece. But the problem is that the underlying component of inflation is actually pretty strong. And so the Fed is gonna have to work at it to get inflation down. It'll take them some time. We're gonna be looking at higher interest rates, whether we like it or not. Higher interest rates ahead. The Fed minutes out for that July meeting chuck at the top of this hour, 20 minutes ago, indicating as we heard that July meeting that the Fed is set to slow the pace of rate rises ahead. Do you think that is appropriate amid this inflationary environment? Well, the one thing that they left out which of course is critical is when are they going to slow the pace of rate increases? Uh that depends on the data. The Fed did say that interest rates are near neutral from a long-term perspective and that's right. The Fed's target for inflation is 2%. So at prevailing interest rates, we have positive real rates across the board. You can make the case that they're near neutral and a lot of people would make that case. But the underlying message, which is really problematical is that near term. We're not near neutral. And the Fed didn't clarify just how far they need to go to raise rates to start restraining the economy. And they clearly need to do that. The market is, on the other hand, thinking that the federal raise rates a few more times and then we'll lower rates early in 23. And that makes no sense at all. And the Fed pushed back against them. They suggested that after they raise rates, the rates are likely to stay at that higher level for a while. And that makes more sense and it's more consistent with historical Fed behavior. So I think the Fed and the markets are not on the same page. I don't know if you can hear some of the noises down here on the floor of the stock exchange chuck, but I think they might agree with you. That ugly woman partner and chief investment officer at advisors Capital Management chuck. Thank you.