U.S. Retail Sales Figures Mostly Disappoint American consumers increased their spending in September amid strong auto sales, but slowing job growth and overseas turbulence has curbed some discretionary spending.
Retail sales rose a seasonally adjusted 0.1% in September from August, the Commerce Department said Wednesday. The increase was largely due to a 1.8% month-over-month increase in auto sales. Excluding motor vehicles and parts, sales at other retailers were down 0.3% in September. (…)
A few bright spots held: U.S. consumers shelled out 0.9% more on clothing and accessories in September than they did in August, and spent 0.7% more at restaurants and bars than the prior month. Restaurant spending is up 7.9% from September 2014. (…)
Discretionary sales were mixed. Electronics, general merchandise, non-store and miscellaneous witnessed a dip in sales this September. However, furniture, clothing, sporting goods and restaurants all posted solid gains. Nondiscretionary sales (gasoline, health care and food) were all weak. ISI estimates that “real consumer spending, based upon the modest downward revisions in the prior two months, is on track to climb +3.3% in 3Q.”
However, sales in the retail control group, which exclude autos, gasoline, building materials & food services and enter the GDP accounts, slipped 0.1% after a 0.2% August rise. This came after a 0.5% jump in July and a 0.3% gain in June.
There seems to be cause to worry about the consumer economy given the dismal trends in sales of the retail control group:
- Last 2 months: +0.6% annualized
- Last 3 months: +2.4% annualized
- Last 4 months: +2.7% annualized
But before panicking and overly worry about weak consumer spending, we must recall that goods are actually deflating in the U.S.. Sequentially, the Goods deflator for the PCE series is down 0.8% since December 2014 and –0.2% in the 3 months to August, the last month the data is available. YoY, Goods prices are –2.8% in August with Durable Goods down 2.8% and Non-Durables –3.0%.
In reality, real retail sales remain pretty strong. Given nominal control group sales up 3.4% YoY in September, they must be up 5%+ in volume as we enter the crucial holidays season. This chart from Doug Short shows the resiliency of control group nominal sales in the face of deflating prices.
If retail sales were as weak as the nominal data suggest,
- retailers would have reigned in employment rather than keep growing their staff 2.0% YoY through September.
- there would have been many negative pre-announcements from retailers and other consumer goods companies. Pre-announcements by Consumer Discretionary companies were 18 negative and 5 positive for Q3’15, in line with the previous 2 quarters but much lower than for Q4’14 (24/3) and Q3’14 (21/3). Yesterday’s WMT bomb seems more WMT than economy related.
To be sure, deflating selling prices are challenging when costs keep rising. Higher volume and solid markups are required. This is why it is encouraging that so few consumer centric companies have negatively pre-announced in Q3.
EARNINGS WATCH
- 38 companies (12.5% of the S&P 500’s market cap) have reported. Earnings are beating by 2.5% while revenues have missed by -0.6%.
- The beat rate is 68% on EPS (70% yesterday) and 39% on revenues (40%).
- Expectations are for a decline in revenue, earnings, and EPS of -3.6%, -5.3%, and -4.1%. Ex-Energy, these would be +1.8%, +1.9%, and +3.2%. This excludes the likelihood of beats, which have been above 4% over the past three years.
- BTW, 9 Consumer Discretionary companies have reported so far. Their revenues grew 6.2% and their EPS 13.7%. (RBC)
U.S. Business Inventories Remain Unchanged
Total business inventories held steady during August (2.4% y/y) for a second month. Revisions to the July figures were minimal. These figures suggest inventories will have little effect on real GDP growth this quarter as in Q2.
Retail inventories increased 0.3% (4.5% y/y) in August, after a 0.7% jump. Motor vehicle & parts inventories advanced 0.2% (6.0% y/y). Outside of the vehicle sector, inventories gained 0.4% (3.7% y/y) paced by a 0.7% rise (6.4% y/y) in building materials. Elsewhere, increases were moderate. Furniture & home furnishings inventories gained 0.4% (-0.7% y/y) while clothing & accessory inventories also rose 0.4% (6.2% y/y). (…)
The business sector inventory-to-sales ratio inched higher to 1.37, equaling its highest level since June 2009. The rise reflected increases in each business sector. The merchant wholesale I/S ratio rose to 1.31, its highest level since early 2009. Retailers’ I/S ratio gained to 1.47, equaling its high for the economic recovery. In the manufacturing sector, the I/S ratio rose to 1.35. It has moved roughly sideways all year, staying near the recovery high.
We sure need the consumer!
U.S. Producer Price Decline Is Broad-Based
The overall Final Demand Producer Price Index fell 0.5% in September (-1.1% y/y) following an unrevised zero change in August. It was the first decline since April. Prices excluding food & energy also fell 0.3% (+0.8% y/y) and reversed a 0.3% increase.
Final demand goods prices (35% of the total index) fell 1.2% (-5.1% y/y), down for the third straight month. The latest decline was led by a 5.9% drop (-23.7% y/y) in energy prices. Gasoline prices were off 16.6% (-42.8% y/) and home heating oil prices fell 6.5% (-44.1% y/y). Residential natural gas prices reversed most of the prior month’s gain and declined 1.1% (-11.8% y/y) and residential electric power costs eased 0.1% (+1.0% y/y). Food prices declined 0.8% (-2.9% y/y), off for the second time in three months. Egg prices have been quite volatile and fell 18.2% m/m, but they have risen by roughly three quarters y/y. Beef & veal prices fell 7.9% (-3.3% y/y) while bakery product prices gained 0.1% (1.1% y/y). Fresh & dry vegetable costs rose 14.7% y/y, but dairy product costs were off 15.0% y/y.
Final demand goods prices excluding food & energy remained stable (0.2% y/y) after falling 0.2% in August. Core finished consumer goods rose 0.2% (2.6% y/y) after two months of remaining unchanged. Core consumer nondurables costs improved 0.2% (3.4% y/y), following two months of no change or slight decline, but consumer durables rose 0.3% (1.6% y/y). Private capital equipment costs improved 0.1% (1.3% y/y) while those for goods for government purchase declined 0.2% (-0.1% y/y). Prices of goods for export fell 0.5% (-3.6% y/y), down for the third straight month.
Final demand services costs (63% of the total index) declined 0.4% (+1.0% y/y) and reversed the August increase. This was led by trade services, which fell 0.4% (+2.1% y/y); trade services represent the margins charged by retail and wholesale dealers and merchants. Prices for transportation of passengers fell 1.8% (-6.6% y/y), repeating their August weakness. Prices for transportation and warehousing of goods in September also repeated the prior month’s 0.3% decline (-2.4% y/y). Other services, including financial, health care and communications, among others, fell 0.3% (+1.0% y/y) after a 0.2% rise.
Fed Doubts Grow on 2015 Rate Increase The chances of a Fed rate increase in 2015 are diminishing amid new signs of anemic economic activity, a disappointing development for central-bank officials who have been hoping to move this year.
Lackluster readings on consumer spending, inflation and jobs have virtually eliminated the chances of a move this month. (…)
Still, the soft retail and inflation reports won’t inspire much confidence among Fed officials, especially a couple of weeks after the Labor Department reported the pace of hiring slowed in September and was weaker than first thought in July and August. U.S. exports are also now on track to decline this year for the first time since the recession. (…)
China Credit Growth Rebounds as Monetary Easing Spurs Loans
Aggregate financing rose to 1.3 trillion yuan ($205 billion), from an originally reported 1.08 trillion yuan in August, according to a report from the People’s Bank of China. (…)
New yuan loans rose to 1.05 trillion yuan, compared to a median estimate of 900 billion yuan in a survey of economists. M2 money supply increased 13.1 percent from a year earlier, matching economists’ median forecast.
China monetary conditions index started to show a rebound since July.
SENTIMENT WATCH
Wal-Mart Surprises Market With Dim Outlook Retailer’s shares sink 10% after it predicts profit decline next year
Wal-Mart Stores Inc. surprised investors Wednesday by predicting profits would drop as much as 12% next year as the world’s biggest retailer by revenue spends heavily to increase wages, improve its cavernous stores and boost online sales.
Wall Street analysts were expecting per-share earnings to be flat or rise as much as 7% from this year.
The company’s leaders, who are in the process of revamping its stores to lure back disaffected shoppers, also warned that they now expect sales growth for the current fiscal year, which ends Jan. 31, to be relatively flat. In February, the company had projected sales growth of 1% to 2%. (…)
Weak Pricing, Pulled Deals Define IPO Market In a clear sign of trouble, supermarket chain Albertsons delayed its plan to sell stock, while payment processor First Data priced its offering lower than its bankers had expected.
There’s a Growing Divide at the Fed, and It’s Time to Brace for Higher Volatility
Despite all the debt ceiling drama, Neil Dutta, head of U.S. economics at Renaissance Macro, says the Federal Reserve has supplanted Congress as the biggest source of policy uncertainty emanating from the nation’s capital. (…)
BlackRock warns of market volatility Fink says new paradigm will produce ‘big winners and big losers’
Larry Fink, chief executive of the world’s largest asset manager, BlackRock, warned that financial market volatility will continue until the Federal Reserve clarifiesmonetary policy. (…)
“There is so much uncertainty in the world and that is leading to more volatility,” Mr Fink said, blaming the conflicting signals from Fed governors on the timing of an interest rate rise. “Some of the official authorities are guilty of, instead of being a calming influence, through their mixed messages, inflaming the markets.” (…)
“We do not have a world where the tide is rising for everybody,” he said. “We are in a new paradigm where there will be big winners and big losers. Countries still focusing on the paradigm of cheap labour and commodities are going to have a harder time.” (…)
Dollar at two-month low as Fed easing whispers start
Having obsessed for months about when U.S. interest rates will start to rise, traders began thinking that maybe, just maybe, they might have to fall again, given limp U.S. retail sales, the biggest producer prices falls in eight months and a $22 billion hammering for the world’s biggest retailer Wal-Mart. (…)
Did you miss yesterday’s 
