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NEW$ & VIEW$ (13 MAR. 2015): Retail deflating? Oil demand reflating?

US retail sales trend worst since 2009

US economic data are turning ugly, and not just because of the weather. Retail sales in the latest three months have suffered the steepest fall since the first quarter of 2009, when the global financial crisis was at its peak.

A 0.6% deterioration in sales in February was possibly due to severe weather affecting many parts of the country in the second half of the month, but this was not a one-off fall. Sales have now fallen in each of the past three months, which rings alarm bells about the health of the US economy. The latest decline follows a 0.8% drop in January and a 0.9% decline in December. Over the past three months, sales are down 1.2% on the previous three months.

So far in the first quarter, retail sales are down 1.6% on the fourth quarter of last year. (…)

Core sales are so far up just 0.1% in the first quarter (yes, that’s an annualised rate of just 0.4%), which means we’re probably going to see some substantial downward revisions to first quarter GDP estimates.

Weather blaming is on:

Weather was likely one factor in disappointing retail numbers last month. The Northeast was particularly hard hit, with Boston receiving record snow and Chicago, Cleveland and Buffalo, N.Y., all registering their coldest February. Other parts of the country, though, were relatively balmy. Arizona, California, Nevada, Utah and Washington all had their warmest winter on record, according to the National Oceanic and Atmospheric Administration. (WSJ)

Remember last year’s weather, dubbed the Polar Vortex? Whatever it was on average this year, it compared against an even worse period last year. And the weather has not been so bad during all three months since December.

Still, even though economists expected to see a weather effect, they were surprised at how weak sales were. Moreover, Thursday’s numbers were just the latest in a string of soft retail reports. Sales away from gasoline stations rose by just 0.1% in January, following a decline of 0.2% in December.

It is not as if people don’t have the wherewithal to buy more. Thanks to the sharp drop in pump prices, Americans spent nearly $10 billion less at gasoline stations in February than they did in the same month last year. Last week’s employment report showed aggregate weekly payrolls—a measure of total U.S. wages—rose 5.4% in February from a year earlier.

And a separate report from the Federal Reserve released on Thursday showed that U.S. household net worth increased to $82.9 trillion in the fourth quarter of 2014, up $4.1 trillion from a year ago. Meanwhile, the household debt-to-income ratio fell to its lowest level in a dozen years. (WSJ)

Such wide gaps between income and spending are really unusual in America. Something else is going on.

A quick look at the recent data gives the impression that sales are chugging along. Retail “control” sales, which go into GDP calculations, are up a nice 4.2% YoY as illustrated by this Doug Short chart:

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But this is an illusion created by the really bad retail sales early in 2014 when the whole country was enveloped in the so-called polar vortex. This abnormally low base has kept the YoY growth rates in the 4% range. But the reality is that sales have been very weak every month since December, falling at surprisingly high rates annualizing the last 3 months.image

Two charts to illustrate the point:

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Sales volumes may be better than suggested by the nominal data. The recent declines could be primarily due to falling prices. Nonfuel import prices fell another 0.3% MoM in February. They have declined every month since September, at an annualized rate of –3.2% during the last 6 months, accelerating to –5.5% in the last 2 months.

We should learn more on this with today’s PPI and next week’s CPI reports.

Unless sales and/or prices pick up measurably in coming months, retailers will start to complain about sales and margins. Economists will need to rethink the oil windfall and a U.S. soft patch scenario will resurface. Haver Analytics calculates that during the last ten years, there has been a 92% correlation between the YoY change in retail sales and the change in real GDP.

Oil slips under $57 as IEA sees bigger glut

“U.S. supply so far shows precious little sign of slowing down,” the IEA said in its monthly oil market report. “Quite to the contrary, it continues to defy expectations.”

“The unwinding of seasonal refinery maintenance may slow U.S. crude stock builds in 2Q15 but will not stop them, and stocks may soon test storage capacity limits. That would inevitably lead to renewed price weakness,” the agency said.

Global supply was up 1.3 million barrels per day (bpd) year-on-year at an estimated 94 million bpd in February, led by a 1.4 million bpd increase from non-OPEC producers, the IEA said.

It saw world oil demand this year at 93.50 million bpd. (…)

News of a deal to end a strike by U.S. refinery workers helped support oil as it could help to increase demand for crude oil for processing in the world’s biggest oil consumer.

The strike, the largest walkout by U.S. refinery workers in 35 years, has affected around a fifth of the oil processing capacity in the United States, limiting throughput.

The deal could reduce U.S. crude stockpiles, which climbed last week to the highest level for this time of year in more than 80 years.

High five But Americans are ON THE ROAD AGAIN:

From Doug Short:

The Department of Transportation’s Federal Highway Commission has released the latest report on Traffic Volume Trends, data through December.

“Travel on all roads and streets changed by 5.0% (11.9 billion vehicle miles) for December 2014 as compared with December 2013″. The less volatile 12-month moving average is up 0.39% month-over-month and 1.69% year-over-year.

Click to View

Americans are back on the road with their new SUV’s. No wonder gasoline consumption is rising.

Sad smile The rising dollar’s ripple effects: U.S. Steel to Idle Minnesota Plant U.S. Steel on Thursday announced more layoffs as it struggles to contend with surging imports and declining demand in the energy sector.

Household Net Worth Rises to Record Americans’ wealth rose to its highest level ever in the fourth quarter of last year—rising about 2% to $1.5 trillion—thanks to gains in the stock market and home prices that could prop up consumer spending and economic growth this year.

(…) A measure of owners’ equity as a share of the value of real-estate holdings hit 54.5%, up from 54% in the third quarter and well above the roughly 40% level in 2010. Growing levels of home equity suggest the benefits of the economic expansion are reaching more people. (…)

A Windfall for China as Commodity Prices Plunge China estimated to be saving over $600 million on its daily oil import bill

(…) By some estimates, China is enjoying annual headline savings of as much as $250 billion from stepped-up purchases of discounted oil, copper and iron ore–much of it arriving aboard dented bulk carriers and greasy tankers at northeastern Dalian port and other trade gateways. (…)

China’s finance ministry said in a report released at the national legislature’s annual session ending Sunday that it planned to spend 154.6 billion yuan ($24.7 billion) this year building up its reserves of grains, edible oils and what it termed “other materials, ” a 33% rise over 2014 when stockpile-spending rose 22%.

The windfall comes on top of China’s steady trade surpluses and nearly $4 trillion in reserves, and makes it more affordable for Beijing to prop up beleaguered oil-producing partners like Russia and Venezuela. (…)

China has long-term oil supply contracts with Venezuela and Russia, two countries that share its suspicion of U.S. policy, and hasn’t re-negotiated terms of delivery since prices tumbled, said American Enterprise Institute scholar Derek Scissors. In doing so, Beijing is betting that timely support will further its longer-term strategic interests and be remembered when prices recover. (…)

Commerce Ministry spokesman Shen Danyang confirmed in a recent briefing that China is boosting commodity imports to take advantage of lower global prices. He said Beijing continues to support longstanding allies. If Russia is in need, “China will provide necessary assistance within its capabilities,” he said. (…)

Russia Cuts Interest Rates Key rate reduced for second time in two months

Russia’s central bank on Friday cut its key interest rate for the second time in two months, by one percentage point to 14%, and said more rate cuts are in the pipeline.

The latest cut follows the central bank’s emergency move in December to sharply raise interest rates to try to stem a collapse in the ruble.

Friday’s move is another sign of confidence from Russian authorities that the worst of the economic turmoil caused by Western sanctions and the plunge in the oil price could soon be over. But economists said it represents a risky bet that Russia’s still-fragile financial system could soon be on the mend.

As well as its key rate, the central bank cut its deposit rate to 13%, while the repo rate went down to 15% on the back of long-awaited slowdown in inflation.

NEW$ & VIEW$ (5 MAR. 2015): Labor costs, Capex, Euro retail sales all rising; China and Russia slowing…

Q4 Productivity and Costs
Beige Book: Hiring, Spending Solid at Start of Year The U.S. economy continued to expand across most of the country at the start  f the year amid broad-based hiring and rising consumer spending, according the Fed’s latest beige book survey of regional economic conditions.

The Fed found modest or moderate growth in eight of its 12 districts, according to the beige book report released Wednesday. Elsewhere the pace of economic activity was increasing only slightly or slowing.

Payrolls “remained stable or expanded” across broad range of sectors, though “wage pressures remained moderate and were limited largely to workers in skilled occupations,” the report said. Prices for goods and services were flat on increasing slightly. (…)

The charts below show average hourly earnings growth rates. Retail and restaurant workers will be happy to learn that they are considered skilled workers by the Fed…

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Big Firms Finally Start to Ramp Up Spending Large companies across the U.S. are gearing up to increase capital spending, and the new business investment could give another boost to the strengthening U.S. economy.

(…) capital investment rose 15% in the fourth quarter to a five-year high of $166 billion, according to an analysis of capital-spending figures for 423 large companies from financial-data firm Calcbench—the third-fastest rise since early 2010. (…)

Among 358 large companies that have reported year-end results, capital expenditures rose by 9% during 2014, according to data from S&P Capital IQ. That outpaces 2013’s meager 2% increase and nearly matches 10% growth in 2012.

Total U.S. business investment isn’t quite that strong. In the fourth quarter, it rose at a 4.8% rate, slower than in the third quarter, the Commerce Department said Friday. But the full year’s investment in equipment, buildings and intellectual property rose faster than during 2013. (…)

EUROZONE RETAIL SALES KEEP SURGING

Continuing the trends of the last several months (see CONSUMERS TO DRIVE ACCELERATING GROWTH), January Eurozone retail sales jumped 1.1% MoM in real terms, the fourth consecutive monthly gain. Since October 2014, real retail sales have accelerated to a 8.3% annualized rate, +9.0% in the last 2 months.

Core real sales are even stronger, rising 10.9% annualized since October, +8.4% in the last 2 months.

Germany is the main growth engine: +19.1% annualized since October, +21% in the last 2 months. Even France is participating, albeit much more modestly: +4.6% since October, +3.0% in the last 2 months. (Eurostat)

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This is much, much better than what we have seen in the U.S. since last fall…That helps explain why the U.S. equity market is the third slowest of the 24 major global markets YtD, even though Consumer Discretionary stocks are up 6.0% versus +2.4% for the S&P 500 Index.

German Factory Orders Decline in Sign of Manufacturing Weakness

Orders, adjusted for seasonal swings and inflation, dropped 3.9 percent after a revised increase of 4.4 percent in December, data from the Economy Ministry in Berlin showed on Thursday. The typically volatile number compares with a median estimate of a 1 percent decline in a Bloomberg News survey. Orders slid 0.1 percent from a year earlier. (…)

Domestic orders fell 2.5 percent and export orders slid 4.8 percent, led by a 9 percent slump in euro-zone orders, the ministry’s report showed. Orders for investment goods fell 4.2 percent, compared with a 0.6 percent decline for consumer items.

January’s drop is largely a consequence of the relatively high increase in orders in the previous month and weaker bulk orders, the ministry said. The trend for orders and the industrial economy remains upward, it said.

China Lowers Growth Target China lowered its economic growth forecast to about 7% this year at the opening of the country’s biggest political event of the year, ushering in what leaders have dubbed a “new normal” of slower growth.

The move signaled Beijing won’t take dramatic action to raise the growth rate above last year’s level, which at 7.4% was its lowest level in nearly a quarter-century. At the same time, its leaders signaled concerns that an even sharper drop in growth risks higher unemployment and social unrest.

In remarks before the country’s lawmakers on Thursday, Premier Li Keqiang listed the challenges to the Chinese economy, including sluggish investment growth, overcapacity, deflationary pressure and increasing public demand for better social services.

The new target “takes into consideration what is needed and what is possible,” Mr. Li said at the opening of the National People’s Congress, China’s annual parliament. Of the challenges, he said, “We must face these problems head on.”

(…) Several times he referred to the necessity of not letting growth slide further. He called for “a medium-high-level growth rate,” and suggested that falling below that would stall the drive to raise incomes. That could leave China in the “middle-income trap”—unable to create enough jobs and fund the transition to an economy driven by services, small business and innovative companies. (…)

In his address Thursday, Mr. Li said China was committed to reform on a number of long-touted fronts to overcome structural “tigers in the road” that impede progress. Among those measures are greater use of cleaner fuel, an expansion of the value-added tax, tighter control over local government debt, further paring of red tape and the rollout of bank deposit insurance.

“As the force that has traditionally driven economic growth is weakening, it is imperative that we intensify structural reform,” Mr. Li said in a hall packed with some 3,000 delegates.

But the premier also warned that reform must be tempered with enough growth to further the nation’s development goals and stem social unrest. China retained its goal for new urban job creation of about 10 million compared with actual creation of over 13 million last year and capped unemployment at 4.5%. (…)

China Sets Wider 2015 Fiscal Deficit in Bid to Cushion Slowdown

The government projects a budget shortfall of 1.62 trillion yuan ($258 billion) in 2015, the Ministry of Finance said in a report presented to the National People’s Congress in Beijing today. That amounts to about 2.3 percent of gross domestic product, it estimated.

China’s central government is assuming some of the debt incurred by local-government financing vehicles as it reshapes its fiscal framework.

RUSSIA’S DEEPENING RECESSION

The HSBC Purchasing Managers’ Index, compiled by Markit from its twin surveys of manufacturing and services, fell from 45.6 in January to 44.7, running below the 50.0 no-change level for a fifth successive month and down to its lowest since May 2009.

The survey data highlight the growing impact of the recent oil price rout on the Russian economy, as well as the damaging effect of sanctions from the West. The service sector suffered particularly badly, with both business activity and new orders dropping to the greatest extents since March 2009.

Although manufacturing output returned to growth after declining in January, the pace of expansion was only modest due to a slump in exports. While domestic orders for goods rose, most likely reflecting import substitution, exports posted one of the sharpest monthly declines since 2009 as sanctions continued to hit trade flows.

Employment fell sharply again as companies scaled back capacity in line with the deteriorating outlook. Headcounts have now fallen continuously for 20 months.

Brazil raises rates to six-year high Central bank tries to rein in rising inflation
Exxon chief says oil prices will stay low Tillerson points to 12 per cent capital spending cut this year

Rex Tillerson’s comments came as the world’s largest listed energy company said it would cut capital spending by 12 per cent this year even while increasing its oil production by 7 per cent, in a sign of how the industry is pushing to cut costs in response to the plunge in crude prices.

Mr Tillerson told an annual meeting for analysts in New York that oil prices had crashed because demand growth in China and elsewhere had slowed, while US supplies were “coming like a freight train”. Those conditions could persist, he suggested.

“My view is people need to kind of settle in for a while,” he said: “There’s a lot of supply out there. And I don’t see a particularly healthy world economy.” (…)

Mr Tillerson said the precedent of the shale gas industry, where production has continued to grow even as prices slumped and the number of rigs drilling wells dropped sharply, suggested that US oil output would be more robust than assumed.

The same companies that had cut costs and increased productivity in shale gas were often involved in shale or “tight” oil as well, he added, meaning that the industry would not be crushed by low prices and competition from other regions. “I think you’re going to see some of the same resilience on the tight oil side, too. And therefore it will compete globally,” he said. (…)

Auto VEHICLES SALES PER CAPITA

A reader made several observations yesterday to the U.S. vehicle sales data. Here’s a partial answer to his questions from Doug Short:

Click to View

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