The major domestic equity indexes closed out the trading day on Friday, virtually unchanged as financials gained with bond yields, while news that Trump was proceeding with tariffs on about $200 billion more of Chinese products limited gains.

Retail Sales Sluggish

Retail sales recorded their smallest gain in six months during August as consumers cut back on purchases of motor vehicles and clothing. However, upward revisions to July’s data will likely keep intact expectations of strong economic growth in the third quarter.

Other data on Friday showed the largest decline in import prices in more than 1-1/2 years in August, amid a decline in the cost of fuels and other goods. The weak import price data came on the heels of soft inflation readings in August.

Signs of cooling consumer spending and inflation did not change the expectation that the Fed will raise interest rates later this month.

According to a morning report by the Commerce Department, retail sales were up 0.1 percent last month, the smallest increase since February. Data for July was revised higher to show sales increasing 0.7 percent instead of the previously reported 0.5 percent gain.

The modest increase in retail sales suggests that high gasoline prices could be pulling spending away from other categories. Retail sales in August advanced 6.6 percent from a year ago.

Excluding automobiles, gasoline, building materials and food services, retail sales were up 0.1 percent last month after an upwardly revised 0.8 percent jump in July. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.

Core retail sales were previously reported to have increased 0.5 percent in July. Despite the slowdown in core retail sales in August, consumer spending remains supported by a tightening labor market, which is steadily pushing up wages.

Annual wage growth increased at its fastest pace in more than nine years in August and there were a record 6.9 million job openings in July. Spending is also being underpinned by tax cuts and higher savings.

The economy is poised for strong growth in the third quarter and this year, but an escalating trade war between the United States and China is casting a shadow on the long-term outlook.

The economy grew at a 4.2 percent annualized rate in the April-June period, the fastest in nearly four years and almost double the 2.2 percent pace set in the first quarter. Growth estimates for the third quarter top a 3.0 percent rate.

Auto sales fell 0.8 percent in August after slipping 0.1 percent in July. Receipts at service stations surged 1.7 percent, likely reflecting gasoline prices, which have risen by about 32 cents per gallon this year according to data from the U.S. Energy Information Administration.

Sales at clothing stores fell 1.7 percent, the biggest drop since February 2017, after accelerating 2.2 percent in July. Receipts at furniture stores fell 0.3 percent and sales at building material stores were unchanged last month.

However, there were increases in online and mail-order retail sales and spending at restaurants and bars increased. Spending at hobby, musical instrument and book stores rose after declining for several months.

In a separate report on Friday, the Labor Department said import prices fell 0.6 percent in August, the largest decline since January 2016, after slipping 0.1 percent in July.

The decline in import prices likely reflects a strong dollar, which has gained more than 6 percent this year against the currencies of the United States’ main trade partners.

For the 12 months through August, import prices rose 3.7 percent, slowing after surging 4.9 percent in July. Prices for goods imported from China slipped 0.1 percent in August for a second straight month. Prices for Chinese imports gained 0.2 percent in the 12 months through August.

Industrial Production Rises

industrial production rose in August, as strong output in auto manufacturing offset lackluster production in the rest of the factory sector. According to a report on Friday by the Fed, industrial production rose 0.4 percent last month after an upwardly revised 0.4 percent increase in July.

Manufacturing output rose 0.2 percent last month, powered by a 4.0 percent rise in motor vehicles and parts. The auto industry assembled cars and trucks in August at an annual rate of 11.54 million units, the fastest pace since April.

However, excluding motor vehicles and parts, our domestic manufacturing production was unchanged, the Fed said. Production fell for computers and electronic products as well as for electrical equipment and appliances.

The data could raise questions over how well factories are weathering an escalation of the trade war with China. The administration raised tariffs on a range of Chinese imports in July, triggering retaliatory tariffs from Beijing on U.S. exports.

Other indicators have been more upbeat. A survey of factory managers showed activity expanded in August at its fastest pace in more than 14 years on strong demand at home and abroad, according to data released by the Institute for Supply Management earlier this month.

Manufacturing, which accounts for about 12 percent of the economy, has been supported by a strong domestic and global economy. But many economists see a risk that escalating trade tensions could undercut business investment.

Mining production rose 0.7 percent in August. Utilities output rose 1.2 percent.

With overall industrial production rising, capacity utilization, a measure of how fully firms are using their resources, rose last month to 78.1 percent from 77.9 percent.

Officials at the Fed tend to look at capacity use measures for signals of how much “slack” remains in the economy — how far growth has room to run before it becomes inflationary.

Fed Will Be Mildly Restrictive in 2019

The Fed’s interest-rate hikes will begin to drag on economic growth and employment by next year, Charles Evans, president of the Federal Reserve Bank of Chicago, said Friday, as the level of borrowing costs appropriately turns “mildly restrictive” after more than a decade of acting as a stimulant.

The remarks by Evans mark a turning point in the thinking of a policymaker who as recently as this past spring was trying to convince his colleagues to stop raising rates to give the economy and inflation a bit more room to run.

Yet, on Friday, Evans said he believes that rates should continue to rise and that by next year monetary policy will begin to “hold back the economy just a little bit.” That view contrasts with fellow Fed policymaker Lael Brainard, who argued earlier this week that even with further rate hikes it will probably be a couple years before borrowing costs start impeding growth.

“The U.S. economy is firing on all cylinders, with strong growth, low unemployment, and inflation approaching our 2 percent symmetric target on a sustained basis,” Evans told the Northeast Indiana Regional Economic Forum.

The economy will likely grow at 3 percent this year before slowing next year, he said, pushing unemployment down from 3.9 percent now to 3.5 percent by 2020, well below the 4.5 percent that Evans believes is sustainable over the long run. Meanwhile inflation, he said, will likely rise a bit above 2 percent, though not far enough to cause concern.

The Fed has been raising rates gradually as the economy has strengthened, and its most recent projections suggest it will continue to do so into next year before slowing in 2020.

The projections show most policymakers expect interest rates to rise to 3.1 percent by the end of next year and 3.4 percent by the end of 2020, above the Fed estimate for a neutral rate setting of 2.9 percent, Evans noted. Neutral is the estimated level of borrowing costs that in a healthy economy neither boosts nor brakes growth.

“This means that the 3 to 3.5 percent level of the funds rate projected for 2019 and 2020 is mildly restrictive,” Evans said. “Given an unemployment rate forecast below the natural rate, such a policy stance would be quite normal and consistent with some moderation in growth and a gradual return of employment to its longer-run sustainable level.”

Policy will, Evans said, respond to circumstance. If uncertainty over trade policy begins to hurt business spending, for instance, the Fed may deliver a shallower path of rate hikes; if the Fed or fiscal policy proves to have been more simulative than thought then it may need to tighten policy further.

But overall, Evans’ message was clear: by next year, higher rates will already start to slow one of the longest economic expansions in U.S. history.

Consumer Sentiment Rises to Six-Month High

Consumer sentiment rose more than forecast during September, reaching a six-month high as consumers grew more optimistic about the economy and their purchasing plans, according to a University of Michigan report.

Sentiment index rose to 100.8 (est. 96.6) from prior month’s 96.2; current conditions gauge increased to 116.1 from 110.3 and the expectations measure climbed to 91.1, a 14-year high, from 87.1 

The optimism reflected recent financial gains, which were cited by 56 percent of households, just below the record of 57 percent reached in March this year and February 1998, the report said.

A measure of buying conditions for long-lasting goods rose to a three-month high, after a decline in August. Consumers’ views of buying conditions for houses, vehicles and household items “grew slightly more optimistic,” according to the report.

That is a good sign for growth in consumer spending, the biggest part of the economy, and in sync with retail sales results for August released on Friday. Consumers also said they benefited from income and wealth increases, supported by higher stock prices and property values.

“Concerns about the negative impact of tariffs on the domestic economy were spontaneously mentioned by nearly one-third of all consumers in the past three months, up from one-in-five in the prior four months,” according to the report.

Other hurdles for households include rising prices and higher borrowing costs, as markets widely project another interest-rate hike by the Federal Reserve this month.

The report also showed consumers anticipate slower gains in prices.

Inflation expectations for the year ahead fell to 2.8 percent from 3 percent in prior month, while the inflation rate over the next five to 10 years was seen at 2.4 percent compared with 2.6 percent in the August survey.

“Personal finances remained very strong due to gains in income and household wealth,” Richard Curtin, director of the University of Michigan consumer survey, said in a statement. However, “the largest problem cited on the economic horizon involved the anticipated negative impact from tariffs.”

An index of expectations for personal finances increased to a 15-year high of 135 from 131 the previous month. The economic outlook in the next 12 months improved, with the index rising to 124 from 118.