U.S. Consumers Show Strength With Jump in Retail Sales Robust spending and a tight labor market complicate the Federal Reserve’s fight against high inflation

Retail sales rose a seasonally adjusted 1.3% in October compared with September, when they were unchanged, the Commerce Department said Wednesday.

Shoppers spent more on increasingly expensive everyday staples such as gasoline and food, but they also shelled out more on discretionary items such as cars, furniture and restaurant meals. Some of the spending was due to purchases of building materials and home furnishings in the aftermath of Hurricane Ian, economists said.

The jump in sales showed households continued to have the resources to increase their spending despite inflation running close to a four-decade high, climbing interest rates and economic uncertainty. (…)

Retailers also started discounting early ahead of the traditional holiday shopping season, and some economists said strong October sales could harbinger less consumer spending later in the year. (…)

More from the WSJ:

Sales at electronics and appliance stores, which were surging a year ago, were down 12.1% from last October. Department store sales were down 1.6%. Sales at furniture and home furnishing stores, and at the category that includes sporting goods stores, hobby stores and the like, were up only modestly, which puts them lower in inflation-adjusted terms.

Meanwhile, sales at food service and drinking places were up 14.1% from a year earlier—a reflection of how people are continuing to shift spending away from the goods they stocked up on during the pandemic toward services categories. Sales at building materials stores were up 9.2%. In its earnings call Tuesday, Home Depot noted that even though the housing market has slowed markedly, it continues to see solid home-improvement demand.

My estimation of real retail sales shows continued negative YoY trends (-1.8% in October):

The Census Bureau is finally waking up to the inflation reality and testing some measures of real retail sales. Their chart is to July 2022:

Last few days:

• WMT showed “encouraging numbers” but food represents about 55% proportion of its sales. CPI Food-At-Home is +12.4%!!!
• TGT’s food sales are lower (~43%). Its comparable-store sales grew 2.7% in its quarter ended Oct. 29. Well below inflation. “Target said demand only worsened later in the quarter. The retailer now expects a low-single digit percentage decline in comparable sales in the fourth quarter and slashed its operating margin expectation to 3%. The company said it would start a cost-cutting effort aimed at saving $2 billion to $3 billion over the next three years.”
• TJX “posted lower sales for the period ended Oct. 29 as declines in its U.S. homegoods division and the strong U.S. dollar weighed on the quarter’s results. U.S. comparable-store sales, which exclude e-commerce sites, fell 2%, driven by a 16% drop in comparable sales for the U.S. homegoods business. Meanwhile, comparable sales for the company’s Marmaxx business, which includes T.J. Maxx, Marshalls and Sierra stores, rose 3%.”

U.S. Industrial Production Slipped in October

Industrial production unexpectedly slipped 0.1% m/m (+3.3% y/y) in October following a downwardly revised 0.1% monthly increase in September (initially +0.4% m/m). The Action Economics Forecast Survey had looked for a 0.2% monthly gain. This was the fourth monthly decline in the past six months, pointing to an industrial sector stressed by a slowing global economy and an aggressive tightening of U.S. monetary policy.

Manufacturing output managed a 0.1% m/m (2.4% y/y) gain in October, the fourth consecutive monthly increase. By contrast, mining production fell 0.4% m/m (+6.9% y/y), its second decline in the past three months. Utilities production decreased 1.5% m/m (+2.5% y/y) in October following a downwardly revised 1.7% monthly decline in September (initially -0.3% m/m).

The rate of capacity utilization fell to 79.9% in October from a downwardly revised 80.1% in September (initially 80.4%, which had been the expansion high). This was the lowest reading in four months. The rate of capacity utilization has been little changed since the spring. The rate of capacity utilization in manufacturing was unchanged at 79.5% in October. Its expansion peak was 80.0% in April. While moving sideways over the past several months, manufacturing capacity utilization remains considerably higher than during the entire decade-long expansion that followed the Great Recession and indicates that manufacturing production may be nearing supply constraints.

By industry group, the slight increase in manufacturing output reflected a 0.5% m/m gain in durable goods production and a 0.3% m/m decline in production of nondurable goods. Durable goods production was led by a 2.0% m/m increase in motor vehicle output, a 1.9% m/m gain in the production of electrical equipment and appliances, and a 1.9% monthly increase in the production of aerospace and other transportation equipment. (…)

By market groups, the production of consumer goods edged up 0.1% m/m in October, just offsetting a 0.1% monthly decline in September. This category has been essentially unchanged for the past three months. By contrast, output of business equipment rose a solid 0.8% m/m, the same increase as in September. Business equipment production has risen 3.3% since June. Construction supplies fell 0.7% m/m in October, their third decline in the past five months. (…)

• “New Orders?” or “No Orders!” The empire manufacturing future new orders indicator has dropped into recession territory.

Source:  @Lvieweconomics (via Callum  Thomas)

AiA: Demand for design services decreases considerably

Demand for design services from architecture firms softened considerably in October, according to a new report from The American Institute of Architects (AIA).

AIA’s Architecture Billings Index (ABI) score for October was 47.7, the first decline in billings since January 2021 (any score below 50 indicates a decline in firm billings). Inquiries into new projects continued to grow in October with a score of 52.3, while the value of new design contracts declined, with a score of 48.6.

“Economic headwinds have been steadily mounting, and finally led to weakening demand for new projects,” said AIA Chief Economist, Kermit Baker, Hon. AIA, PhD. “Firm backlogs are healthy and will hopefully provide healthy levels of design activity against fewer new projects entering the pipeline should this weakness persist.”

CalculatedRisk adds:

This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions. This index had been positive for 20 consecutive months.   This index usually leads CRE investment by 9 to 12 months, so this index suggests a pickup in CRE investment in early 2023, but if the weakness persists – a slowdown in CRE investment later in 2023.

Note that multi-family billing turned down in September and declined again in October, and if that continues, we will see a downturn in multi-family starts sometime in 2023.

U.S. Home Builder Index Continues to Fall

The Composite Housing Market Index from the National Association of Home Builders-Wells Fargo fell 13.2% (-60.2% y/y) during November to 33, the lowest level since April 2020. The index is down 63.3% from its November 2020 high of 90. A reading of 36 had been expected in the Informa Global Markets survey.

Each of the three HMI components declined again this month. The index of present sales conditions fell 13.3% (-56.2% y/y) to 39, the tenth decline in eleven months. The November level was 59.4% below the record-high of 96 in November 2020. The index of expected sales over the next six months dropped 11.4% in November (-63.1% y/y), down for a seventh consecutive month. The November value was the lowest level since April 2012. The index measuring traffic of prospective buyers fell 20.0% (-71.0% y/y), the eighth consecutive monthly decline.

Among the regions of the country, the Housing Market Index in Northeast fell 36.2% (-56.5% y/y). The other regions, the index in the South fell 17.1% (-60.9% y/y). In the Midwest, the index weakened 2.7% (-52.0% y/y). Working 12.0% higher (-68.2% y/y) was the index in the West.

Reducing Inflation Without a Recession Might Not Be Feasible, Fed Official Says Kansas City Fed President Esther George cites the tight labor market for continued high inflation.

BTW: The section of the U.S. Treasury yield curve that most accurately predicts economic downturns has “inverted,” or gone negative (Axios)

Data: FactSet; Chart: Axios Visual

• Fed’s Daly Says Rate Peak of 4.75% to 5.25% Is Reasonable Range Pausing rate hikes is off the table
• J.P.Morgan predicts a mild U.S. recession next year
• Financial Risks Shouldn’t Shape Fed Rate Decisions, Williams Says The Federal Reserve should stay focused on its economic goals and avoid incorporating financial stability risks into its deliberations as it raises interest rates

(…) The remarks, coming from a top Fed official amid heightened volatility in financial markets, underscored the central bank’s resolve to keep monetary policy tight enough to slow the economy and bring inflation down from the four-decade highs reached this year.

Williams, who as president of the New York Fed plays a key role overseeing the central bank’s main point of contact with the financial system, suggested efforts to strengthen its resiliency in recent years are allowing officials to stay focused on the inflation fight, which he described as “of paramount importance.” (…)

Williams’s remarks followed a blog post on the bank’s website the day before highlighting the deterioration of liquidity in the Treasury market this year. Its authors said worsened liquidity conditions in the critical market were “consistent with the current level of volatility” and reflected a “well-known negative relationship between volatility and liquidity.” (…)

“Lower-than-usual liquidity implies that a liquidity shock will have larger-than-usual effects on prices and perhaps be more likely to precipitate a negative feedback loop between security sales, volatility, and illiquidity.”

• The cracks in the US Treasury bond market “The odds of a financial accident are just higher”

Inflationary Pressures in Canada Hit Their Broadest Since 1991 Annual price gains stalled at 6.9% in October from a peak of 8.1% in June

(…) But over 85% of 62 subcategories tracked in the consumer price index are still rising by more than the Bank of Canada’s 2% inflation target. That’s the highest proportion since 1991, well above the historical average of 56% and up from 79% in September.

In March, when Governor Tiff Macklem began an aggressive series of interest-rate increases, 71% of subcategories were above target. Nearly three-fifths of prices are now rising by more than 5% on an annual basis. (…)

Eric La Fleche, chief executive officer of supermarket chain Metro Inc., said Wednesday that suppliers are expecting to pass on higher costs to customers in the new year. “The inflation outlook remains uncertain as we continue to receive many vendor requests for price increases,” he said on a conference call. (…)

Two key inflation measures tracked closely by the central bank — the so-called trim and median core rates — inched higher, averaging 5.05% in October from 4.95% a month earlier. On a month-over-month seasonally adjusted basis, the consumer price index rose 0.6%, up from 0.4% in September. (…)

Alibaba Posts Surprise Loss as China Covid Curbs Take a Toll

Revenue rose a slightly less-than-expected 3% to 207.2 billion yuan ($29 billion) in the September quarter, versus the 209 billion yuan average projection. It reported a net loss of 20.6 billion yuan versus estimates for a profit of 18.8 billion yuan, after adjusting for market investments. The company also green-lit a $15 billion expansion to its buyback program.

Wall Street Sours on Coinbase, Signaling Broad Crypto Doubts The prices of the exchange’s stock and bonds reflect anxieties after the collapse of rival FTX and sharp declines in bitcoin.

(…) Coinbase has been burning through its cash and losing the confidence of investors. Its shares are down 81% since the start of the year, its market capitalization has shrunk to $11 billion [from $85B], and its bonds are trading at a little more than half their face value. (…)

Last quarter, Coinbase burned through $278 million in cash, according to S&P Global Market Intelligence. That happened even though it saved $391 million in cash outlays by paying employees with stock—an unsustainable amount, some investors argue, given the company’s declining stock price. (…)

The contagion is underway (from Bloomberg and Axios):

• Crypto Lender BlockFi Plans Bankruptcy Filing Within Days
• Bankrupt crypto brokerage firm Voyager Digital, whose assets FTX founder Sam Bankman-Fried agreed to purchase for $1.4 billion, has reopened bidding to find a replacement buyer.
• Crypto hedge fund Galois Capital said roughly half its capital is stuck in FTX, according to the Financial Times.
• Travis Kling, who ran crypto hedge fund Ikigai Asset Management said on Tuesday that “a large majority of the hedge fund’s total assets” had been ensnared in FTX.
• The Gemini Earn program allowed users to deposit their coins in exchange for regular interest payments — typically at generous rates that could be as high as 8%. In a note to clients posted on its site, Gemini pointed out that its lending partner in the Earn program — a separate crypto lender known as Genesis — had “paused withdrawals and will not be able to meet customer redemptions within the service-level agreement (SLA) of 5 business days.”

U.S. Supplier Price Increases Eased in October, Taking Pressure Off Inflation Producer-price index gains have moderated in recent months

The producer-price index, which generally reflects supply conditions in the economy, climbed 8% in October compared with the same month a year ago, the Labor Department said Tuesday. Though prices continued to rise rapidly, the pace marked an easing from September’s revised 8.4% increase, and was down sharply from the 11.7% increase in March, the highest since records began in 2010. (…)

On a monthly basis, the PPI increased 0.2% in October from September. That was the same as the revised 0.2% increase in September, and matched the average monthly gain in the two years before the pandemic. (…)

The so-called core price index—which excludes the often-volatile categories of food, energy and supplier margins—climbed 0.2% in October from a month earlier, after gaining a revised 0.3% in September. That pace was down markedly from the 1.0% monthly gain in March. On a 12-month basis, core PPI eased to 5.4%, from 5.6% in both September and August. (…)

More from Haver Analytics:

The PPI for goods less food & energy eased 0.1% (+6.6% y/y) in October after holding steady in September. Finished consumer goods prices less food & energy increased 0.2% (7.7% y/y) for the second straight month. Durable consumer goods prices eased 0.1% (+6.7% y/y) while core nondurable consumer goods prices rose 0.3% (8.2% y/y). (…)

Services prices less trade, transportation & warehousing improved 0.2% (3.0% y/y) after rising 0.5% in September.

Last 3 months annualized: core goods: +0.4% with most prices in the pipeline deflating, services: +4.0%.

Goldman Sachs: “Based on details in the PPI and CPI reports, we estimate that the core PCE price index rose 0.24% in October, corresponding to a year-over-year rate of +4.97%. Additionally, we expect that the headline PCE price index increased 0.36% in October, or increased 6.02% from a year earlier.”

Core PCE inflation was +0.54% in August and +0.45% in September.

History Lessons: How “Transitory” Is Inflation?

Rob Arnott is the corresponding author.

Key Points

• The US Federal Reserve Bank’s expectations for the speed of reverting to 2% inflation levels remains dangerously optimistic.

• An inflation jump to 4% is often temporary, but when inflation crosses 8%, it proceeds to higher levels over 70% of the time.

• If inflation is cresting, inflation levels of 4 or 6% revert by half in about a year. If inflation is accelerating, 6% inflation reverts to 3% in a median of about seven years, threatening an extended period of high inflation.

• Reverting to 3% inflation, which we view as the upper bound for benign sustained inflation, is easy from 4%, hard from 6%, and very hard from 8% or more. Above 8%, reverting to 3% usually takes 6 to 20 years, with a median of over 10 years.

• Goods inflation falling much faster than in the stagflation era (NBF)

Recent developments in the U.S. offer hope that the Federal Reserve may soon declare a ceasefire and pause its tightening campaign. Year on year, headline inflation clocked in at 7.7% in October, down from 8.2% the prior month and two ticks below the median economist forecast. While these figures remain unacceptably high, there are signs of a more significant turnaround, particularly in the consumer goods segment where price cuts are now being made.

After a stable reading in September the core goods CPI fell 0.4% in October. As a result, three-month annualized inflation, which was a record 26.3% in June 2021, was only 0.4% in October 2022.

As today’s Hot Chart shows, this improvement is much faster than in the stagflation era when it took more than a decade of high unemployment to bring inflation down to current levels. A wave of major corporate layoffs, accompanied by forced deleveraging, could still be avoided to get inflation back to normal.

• Almost Daily Grant:

Inflation expectations are entrenching themselves, the Federal Reserve Bank of New York finds today, as its latest consumer survey reveals that respondents expect price growth of 5.9% over the next 12 months and 3.1% during the next three years. That compares to 5.4% and 2.9%, respectively, last month.

CoreLogic: Annual Single-Family Rent Growth Decelerates for Fifth Consecutive Month

(…) Year-over-year single-family rent growth slowed for the fifth consecutive month in September 2022 to 10.2%, down from a high of 13.9% in April 2022. (…)

“Annual single-family rent growth decelerated for the fifth consecutive month in September but remained at more than twice the pre-pandemic growth rate,” said Molly Boesel, principal economist at CoreLogic. “High mortgage interest rates may be causing potential homebuyers to hit pause and remain renters, keeping pressure on rent prices.  However, the monthly rent change was negative in September, resuming the typical seasonal pattern for the first time since 2019, which could signal the beginning of rent price growth normalization.” (…)

Food Prices Are Coming Down — Just Not in Time for Thanksgiving

(…) The fall in wholesale agricultural commodities prices will take some time to filter down into the supermarkets. And their high energy and transportation costs will still offset some of the declines. (…)

Deflation is already visible in large swathes of food categories, including fish, legumes and certain kinds of meat and vegetables. The cost of lamb, for example, is down 25% since January. Salmon prices are down 40% from their most recent peak. Poultry prices have tumbled more than 25% since the beginning of the year. And from a recent peak only a few months ago, chickpeas, a staple for one billion people in south Asia, are down 20%, while tomato prices in Europe have fallen 40% and palm oil in Asia is down almost 50%. (…)

Walmart Sales Rise as Retail Giant Gains Shoppers Comparable U.S. sales, those from stores and digital channels operating over the past 12 months, rose 8.2% through Oct. 28 from a year earlier.

(…) Sales of groceries, store brands and seasonal items were strong, the company said, helped by higher prices. Shopper visits to stores increased 2.1% in the third quarter. (…) The average amount that Walmart U.S. shoppers spent per trip rose 6% from last year, while it increased 4.9% for Sam’s Club shoppers. (…)

Inventories were more than 12% higher than a year ago, compared with increases of 25% and 33% in the previous two quarters. (…) Walmart’s U.S. business has under $1 billion in excess inventory, down from about $1.5 billion last quarter, company executives said. Most of that is now in stores, not in the supply chain, which gives Walmart more control over how to offload it, said John David Rainey, Walmart’s chief financial officer, in an interview. (…)

Shoppers are buying those [discretionary] items when they are on sale, he said. (…) Inflation is cooling in some general-merchandise categories, he said, but is persistent in food.

Walmart’s stock rose nearly 7% to $147.44 in Tuesday trading, as the company raised its sales outlook and said earnings on an adjusted basis would decline by a smaller margin than it previously expected. The share-price gain also came as the company reported that it swung to a quarterly loss after settling a series of lawsuits related to dispensing opioid medication.

 Target Corp. and Macy’s Inc. are slated to release their quarterly reports later this week. Home Depot Inc. also on Tuesday reported steady sales growth in its latest quarter, with comparable sales up 4.3% in the quarter ended Oct. 30, lifted by higher prices. (…)

Balances Are on the Rise—So Who Is Taking on More Credit Card Debt?

Total household debt balances continued their upward climb in the third quarter of 2022 with an increase of $351 billion, the largest nominal quarterly increase since 2007. This rise was driven by a $282 billion increase in mortgage balances, according to the latest Quarterly Report on Household Debt & Credit from the New York Fed’s Center for Microeconomic Data.

Mortgages, historically the largest form of household debt, now comprise 71 percent of outstanding household debt balances, up from 69 percent in the fourth quarter of 2019.

An increase in credit card balances was also a boost to the total debt balances, with credit card balances up $38 billion from the previous quarter. On a year-over-year basis, this marked a 15 percent increase, the largest in more than twenty years.

Credit Card Balances Are on the Upswing

Source: New York Fed Consumer Credit Panel / Equifax.

Delinquency Rates Remain Low Despite Recent Increases

Source: New York Fed Consumer Credit Panel / Equifax.

• Loan defaults may be starting to rise

Industry-wide data shows that less affluent borrowers are leading the way with impairment levels on unsecured personal loans that are about twice as high as before the onset of COVID. By comparison, highly affluent borrowers are now roughly back to being in line with pre-COVID impairment levels, although they continue to rise.” – Upstart (UPST ) CFO Sanjay Datta (via The Transcript)

Empire State Manufacturing Index Shows Modest Improvement in November

The Empire State Manufacturing Index of General Business Conditions was 4.5 in November, an improvement from October’s -9.1. This latest reading is the first positive one since July. Also, it is more favorable than the Action Economics Forecast Survey, which anticipated -7.5. The latest survey was conducted between November 2 and 9.

Haver Analytics constructs an ISM-adjusted Empire State diffusion index using methodology similar to the ISM series and information from five component indexes in the survey. This measure had an improvement, registering 53.7, up from 51.5 in October.

(…) As last month, the details in this report are mixed. Shipments were stronger (…). But new orders increased at 29.1% this month and decreased at 32.4%, for an index reading of -3.3, noticeably less than October’s +3.7. (…)

The labor-related components were both positive: the index of the number of employees increased from 7.7 to 12.2 (…). The average workweek index rose to 6.9 from 3.3 (…).

Inflation pressure was evident in the prices paid readings, (…) the overall prices paid index increased from 48.6 to 50.5.

(…) the prices received index was 27.2 this month, up from 22.9 in October.

Looking ahead six months, the respondents were more pessimistic. The general business conditions reading fell to -6.1 from -1.8. New orders, shipments and inventories all moved in a negative direction while unfilled orders and delivery times did improve but that’s because they were less negative than their respective October readings. Inflation expectations decreased modestly.

China’s home prices see biggest fall in 7 years, recovery bumpy

New home prices slumped 1.6% year-on-year after a 1.5% fall in September, according to Reuters calculations based on National Bureau of Statistics (NBS) data on Wednesday. That was the biggest annual drop since August 2015 and the sixth month of contraction. (…)

New home prices declined 0.3% month-on-month after easing 0.2% in September. Out of the 70 cities surveyed by NBS, 58 reported month-on-month price falls in October, up from 54 cities in September.

Data on Tuesday also pointed to further weakness in the cash-strapped sector, showing property investment fell at its fastest pace in 32 months in October and sales slumped for the 15th straight month.

Even dubious official data show home prices deflating at an accelerating pace: -3.0% a.r. in the last 2 months, -3.6% in the last month.

GETTING SENTIMENTAL? …

From SentimenTrader:

(…) A six-month average of the four surveys has now dropped to the lowest on record. It exceeds the worst pessimism during the financial crisis, the early 1990s savings-and-loan debacle, and the late ’70s period of general malaise. All were associated with recessions.

When the 6-month average of these surveys got this low, it was early during the financial crisis, and investors in the S&P 500 were still nursing losses three years later not including dividends. The others, however, coincided with the ends of bear markets or just after. Given that the 6-month average will now be dropping off low readings from June, it’s almost certain to have formed a trough in November. (…)

What the research tells us…

Surveys of consumer sentiment in the U.S. and pretty much everywhere else are in the toilet. They’ve plunged to some of the lowest levels on record, if not the lowest. Issues other than stock prices drive these surveys, and they’re not necessarily good timing mechanisms for the stock market – we can look at 2008 for evidence of that. But the wealth effect is real and a significant factor in how consumers feel about their finances. By the time it has gotten as depressed as it is now, lasting as long as it has now, the long-term returns of stocks have been consistently and strongly positive.

…OR RATIONAL?

Many analysts expect an earnings recession ahead. (The Daily Shot)

Source: Morgan Stanley Research

China Tells Russia It’s Willing to Facilitate Any Ukraine Talks