Retail Sales in U.S. Unexpectedly Fall on Broad-Based Retreat
Purchases decreased 0.3 percent after a 1 percent advance in May that was smaller than previously reported, Commerce Department figures showed Tuesday in Washington. The median forecast of 82 economists surveyed by Bloomberg called for a 0.3 percent gain. Eight of 13 major retail categories showed declines in demand.
An early Memorial Day holiday probably contributed to boosting sales in May at the expense of last month, marking a more subdued performance for the quarter. (…)
Retail sales excluding autos fell 0.1 percent after a 0.8 percent increase in May, Tuesday’s report showed. They were projected to rise 0.5 percent, according to the Bloomberg survey median.
Core sales, the figures that are used to calculate gross domestic product and which exclude such categories as autos, gasoline stations and building materials, declined 0.1 percent last month after increasing 0.7 percent in May. The median estimate in the Bloomberg survey called for a 0.3 percent gain.
Averaging May and June, retail sales climbed 0.15 percent excluding autos and gasoline. That matched the average gain over the first four months of the year, suggesting there is little momentum in spending. (…)
Tuesday’s report probably means that economists will lower second-quarter forecast. The household spending that makes up almost 70 percent of the economy grew at a 2.9 percent annualized rate from April through June following a 2.1 percent advance in the first three months of the year, according to the median projection of economists surveyed by Bloomberg. Purchases will rise at a 3.1 percent annualized pace in the third quarter and 3 percent rate in the final three months of 2015, according to the survey. (Chart from Zerohedge)
Small-Business Optimism Tumbles in June
The National Federation of Independent Business’s small-business optimism index unexpectedly fell to 94.1 in June from 98.3 in May. Economists surveyed by The Wall Street Journal projected the index to be little changed in June at 98.4.
“It’s not a recession signal, but a clear sign that economic growth on Main Street is not set for a strong second half of growth,” the report said.
None of the 10 subindexes increased in June: nine declined and one was unchanged.
Business conditions expectations fell six points to minus 9% and plans to increase inventories fell eight points to minus 4%.
The NFIB also found that the net percentage of owners reporting higher nominal sales in the past three months compared with the prior three months fell 9 points to a net minus 6%.
The net percent of small-business owners that raised selling prices was 5% in June, down one point. “There are no signs of inflation bubbling up on Main Street,” the report added. (Chart from Doug Short)
U.S. Wholesale Inventory Accumulation Strengthens
“Strengthens” can have several meanings. From a GDP viewpoint, rising inventories boost GDP. From a merchant’s viewpoint, rising inventories can mean danger, especially if sales are not “strengthening” along, which is what is currently happening.
Inventories at the wholesale level increased 0.8% during May (5.0% y/y) following an unrevised 0.4% April gain. The rise was paced by a 4.4% jump (-16.7% y/y) in petroleum inventories which followed a 3.1% April increase. There also was strength in other nondurable industries. Drugs & druggist sundries inventories gained 2.7% (16.1% y/y) and chemical inventories rose 1.4% (1.8% y/y). These gains were offset by a 1.9% drop (+1.9% y/y) in paper inventories. Durable product inventories gained 0.6% (6.2% y/y) led by a 2.5% jump (7.5% y/y) in computer equipment. Automotive product inventories increased 1.2% (12.2% y/y) and furniture inventories gained 0.4% (6.8% y/y). Electrical equipment inventories rose 0.3% (6.9% y/y) while metals inventories improved 0.2% (4.2% y/y).
Wholesale sales continued to loose steam as a 0.3% increase (-3.8% y/y) followed a 1.7% April jump. A 4.3% increase (-32.5% y/y) in petroleum sales was accompanied by a 1.1% rise in paper products. These gains were offset as chemical sales declined 1.0% (-8.0% y/y) and apparel sales were off 1.2% (+1.1% y/y). Durable goods sales eased 0.1% (+1.6% y/y) as a 2.8% decline in furniture sales (+7.4% y/y) was offset by a 2.2% rise (9.4% y/y) in motor vehicles. Machinery sales improved 0.4% (-0.1% y/y) but computer equipment sales eased 1.0% (-2.9% y/y).
The inventory to sales ratio amongst wholesalers held steady m/m at 1.29 but that was up from 1.19 one year earlier. Motor vehicles ratio rose to 1.64 from 1.60 last May and computers jumped to a recovery high of 0.85 from 0.77 last year. The I/S ratio in the metals sector increased to 2.32 from 1.98 twelve months earlier but the ratio in furniture held steady y/y at 1.62. In the nondurable goods sector, the I/S ratio remained quite high at 0.95, up from 0.85 last May. The petroleum ratio was 0.43 compared to 0.35 and apparel jumped to 2.01 from 1.85 in May 2014.
CHINA HARD-LANDING?
We know that car sales were down in June to the same level they were 2 years ago. The OECD LEI for China declined further in May and is down YoY. More recent data like Evercore ISI company survey of China sales reached a new low last week and is near its 2009 low.
Commodity prices are in a free fall with the GSCI down 34% YoY.
(…) a continuation of China’s slowdown in the next years may drag global economic growth below 2 percent, a threshold he views as equivalent to a world recession. It would be the first global slump over the past 50 years without the U.S. contracting. (…)
China in June recorded a 3.4% monthly year-over-year drop in new car sales, its first decline in more than two years. More worryingly, the China Association of Automobile Manufacturers also cut its growth forecast to 3% from 7% for this year. (…)
European auto stocks have soared this year as the European recovery gathered pace and the weak euro boosted hopes for overseas sales. Peugeot, for example, is up 80% this year, partly on hopes for Chinese growth helped by state-owned Dongfeng Motor Corporation’s 14% stake in the company. Volkswagen already generates about 37% of its group unit sales in China: Associate earnings from its China joint venture alone accounted for more than 35% of the group’s pretax profit, Morgan Stanley estimates. (…)
The Markit Global Business Outlook Survey, which looks at expectations for the year ahead across 6,500 companies, found corporate optimism to have dipped to a post-financial crisis low in June.
The number of companies expecting their business activity levels to rise over the coming year outnumbered those expecting a decline by 26%, but that’s down from a net balance of +39% this time last year, with optimism having steadily waned over the course of the past 12 months.
Global business activity future expectations
Optimism in the US – which has been a major driver of the global economic recovery in recent years – remained stuck at the post-recession low seen in the prior (February) survey, with a net balance of +24%. Confidence picked up slightly in services but fell to a new low in manufacturing, where firms expect to continue to be hit by the strong dollar.
Eurozone Factory Output Falls Signs European Central Bank’s new stimulus program is beginning to reach the wider economy
The European Union’s statistics agency said that production by factories, mines and utilities during May was down 0.4% from April, but up 1.6% from the same month in 2014. Output was unchanged in April and declined in March, so output last rose on the month in February, and remains well below the levels recorded before the 2008 financial crisis, underlining the glacial pace of the eurozone’s recovery from that trauma. (…)
In Germany, output was flat, while France, Italy and Spain all recorded increases.
According to the ECB’s quarterly survey, banks loosened the terms on loans to businesses and for home purchases during the second quarter. In both cases, competition among banks was the main driver of this trend, the ECB noted.
Meanwhile, “net demand for loans to enterprises increased substantially, owing mainly to the general level of interest rates,” the ECB said. “Fixed investment also contributed to an increase in demand. Net demand for housing loans continued to increase substantially owing to the low level of interest rates and to housing market prospects,” it said. (…)
And in a positive sign for the bloc’s recovery, the standards for business loans in France and Italy continued to ease last quarter.
OIL
Iran Nuclear Deal Is Reached Iran reached a landmark nuclear agreement with the U.S. and five other world powers, a long-sought foreign policy goal of the Obama administration that sets the White House on course for months of political strife.
(…) At the heart of the agreement between Iran and the six powers—the U.S., U.K., Russia, China, Germany and France—is Tehran’s acceptance of strict limits on its nuclear activities for 10 years. These are supposed to ensure that the country remains a minimum of 12 months away from amassing enough nuclear fuel for a bomb. After the 10-year period, those constraints will ease in the subsequent five years.
In exchange, the U.S., the European Union and the United Nations will lift tight international sanctions on Tehran, a move that Western diplomats say could help Iran’s economy to expand by 7% to 8% annually for years to come.
Iran, which analysts say could double oil exports quickly after sanctions are lifted, will also receive more than $100 billion in assets locked overseas under U.S. sanctions. (…)
The nuclear agreement still faces significant hurdles before it takes full effect.
Iran must take an array of specific steps. It must disable two-thirds of its centrifuge machines used to enrich uranium, which can be used as fuel for nuclear energy or nuclear weapons. It must slash its stockpile of enriched uranium and redesign its nuclear reactor in the city of Arak so that it produces less plutonium, which can also be used in a weapon. (…)
After years of stalling, Iran also must disclose information on its past nuclear activities, which many Western officials believe was aimed at gaining nuclear weapons know-how. Iran must provisionally implement an agreement giving United Nations inspectors much broader access to sites inside the country and eventually get parliamentary approval for that agreement.
The nuclear deal will fan intense political debate in Washington, where Congress may vote within 60 days on the agreement. (…)
Iran’s Discount Deal for Global Oil Questions remain over the effect lifting sanctions on Iran could have on the world market
Iran needed oil at north of $130 a barrel to balance its books in 2013, according to Sanford C. Bernstein estimates. But every extra barrel sold does bring in more cash and, even at $50, Iran makes a profit of more than $40 on every barrel sold, according to Bernstein.
That is what makes the lifting of sanctions doubly pernicious for any hopes of a big rebound in prices. Rising Iranian supply looks well-timed to coincide with flatter non-OPEC output next year, negating the latter’s support and, as was the case on Tuesday morning, weighing on 2016 oil futures.
Saudi (oil) tap: Will crude output go up to 11m b/d? Riyadh has a ‘Spinal Tap’ option to crank up the volume as production hits record levels
(…) There are several theories. The first is the most simple and is Saudi Arabia’s stated policy: it is raising output in response to stronger demand and it believes the cheapest producers should have the biggest share of the market. This may be true to an extent, but the market is far from tight.
The second sees Saudi Arabia ramping up output ahead of Iran returning in full force to the oil market after a nuclear deal with western powers. (…)
Iran has at least 17m barrels of crude oil stored at sea ready to be shipped to an already oversupplied market, the International Energy Agency said last week. It also has a further 22m barrels of condensate, a type of ultra light oil, sitting on vessels waiting to sail to customers.
Given Saudi Arabia’s opposition to the Iranian nuclear deal, reported to have been agreed as of Tuesday morning, it is unlikely to want to cede market share or see its regional rival enjoy a higher price.
That feeds into the third theory which is that Saudi is raising output as oil prices are still, in its view, too high.
Brent, the international benchmark, has averaged more than $60 a barrel since April and has approached levels that may allow US shale and other higher cost producers to lock-in prices that will let them keep on pumping next year. (…)
Forecasters Miss Again
(…) The optimism bias in economic forecasts is well documented and widespread. In a 2011 study for the US National Bureau of Economic Research, Jeffrey Frankel found that for 33 countries, on average, the upward bias in real GDP forecasts is 0.4% when looking one year ahead, 1.1% at the two-year horizon and 1.8% at three years. Despite Frankel’s findings, forecasters retain their optimism bias. In recent years, this bias has had a seasonal component, with optimism seemingly peaking in December-January as year ahead forecasts are publicized. 2015 is proving no different.
The table below presents revisions in 2015 growth and inflation forecasts for the twelve economies that I regularly monitor in this blog.
The table compares forecasts made at the turn of the year with revised forecasts published last week by two of the very best global forecasting organizations, the International Monetary Fund (IMF) and JP Morgan Economics (JPM). For real GDP growth, there are substantial downward revisions across a wide range of countries. [Note that revisions to global growth are smaller, but this appears to be due to shifts in purchasing power parity (PPP) weights toward higher growth economies like China and India].
With all of the recent angst over Grexit and the bursting of China’s stock market bubble, it is perhaps surprising that the largest downward growth revisions are not in Europe or Asia, but instead in the Western Hemisphere. The most significant downward revision is for the world’s largest economy, the United States. The IMF has downgraded its’ dizzying 3.6% forecast for US growth to 2.4%, while JPM has cut from 3.0% to 2.2%. The downgrade to US growth has cascaded through the hemisphere, with Mexico downgraded from robust to moderate growth, Canada downgraded from moderate growth to near-recession, and Brazil downgraded from virtually no growth to outright recession.
By comparison, growth downgrades are more moderate for Japan, the UK, Australia and Korea. There is a notable growth upgrades for India. Growth forecasts for the Eurozone and China are little changed, as is Russia’s recession forecast.
This is where the optimism bias continues to rear its’ head. Do forecasters really believe that the disappointments in Western Hemisphere are over and that the recent turmoil surrounding Greece and China will have no impact on Eurozone and Chinese growth? Could the turmoil be a harbinger of further problems within these large economies? (…)
CANADA: LOWER RATES COMING?
To cut or not to cut rates on July 15? That won’t be an easy decision for the Bank of Canada‘s (BoC) cautious leader Mr. Poloz. Real GDP growth has clearly undershot the BoC’s forecast calling for 1.8% growth in Q2. But this is definitely not the case for household income. Buoyed by a surge in full-time employment, the wage-bill grew at its fastest pace in seven years in the three months through June (7% annualized). Ontario, the province that is expected to lead the country out of its GDP stagnation in H2 2015 is taking its role very seriously: more than 106 thousand full-time positions were created in just six months with more than 98 thousand private-sector jobs. Quebec and British Columbia are also showing good additions to permanent positions. Even Alberta is still showing positive job growth on a year-to-date basis (though jobs were down in June). Under these circumstances, it is not surprising to see auto sales and home starts rebounding strongly at the national level as we head into Q3. If not for consumers, why would the BoC again lower rates from already very accommodative level? Some pundits make the case that a rate cut would be justified on the grounds that a cheaper currency is just what Canada needs to re-launch exports. We are not so sure about that. In our view, the recent relapse in non-energy exports is essentially due to weak U.S. growth in H1 2015. In any event, we think Mr. Poloz should wait a little longer to assess the impact of faster U.S. growth. As today’s Hot Charts show, the Canadian dollar effective exchange rate index (CERI) is already at a post-recession low early in Q3 and Mrs Yellen continues to guide towards a Fed rate hike before the yearend. Irrespectively of what Mr. Poloz does next week, the medium-term outlook is for CERI to move lower – unless he decides to hike. (NBF)
