Strong Holiday Spending Adds to Soft-Landing Signs A surprise increase in November retail sales reinforced growing sentiment that the U.S. will beat inflation without significantly weaker growth.
A surprise increase in November retail sales dispelled lingering pessimism about the economy and reinforced growing sentiment that the U.S. will beat inflation without paying the price in significantly weaker growth.
Signaling a strong start to the holiday season, retail sales rose a seasonally adjusted 0.3% in November from the month before, the Commerce Department said Thursday. That was a rebound from October’s downwardly revised 0.2% decline and a surprise to economists who had expected sales to fall again last month. (…)
The retail report showed sales, excluding gasoline and autos, rose an even stronger 0.6% last month from October, after increasing just 0.1% the prior month, suggesting Americans are shopping and dining out to start the holiday season. Overall sales rose 4.1% in November from a year earlier, outpacing cooling inflation. (…)
In November, auto sales boosted overall spending as the auto workers strike ended even as interest rates made it more expensive to buy a car. Cheaper gasoline reduced the dollar-value of spending, but gave consumers money to spend elsewhere. (…)
Excluding autos and gasoline, sales were up a solid 0.6%. A price-related 2.6% drop at gasoline stations weighed on total sales since the retail data are reported nominally. Broader control group sales, which strips volatile categories, were up 0.4%.
After adjusting for price growth last month, we estimate inflation-adjusted control group sales rose 0.9%.
Significantly, sales at restaurants and bars jumped 1.6% MoM after +0.5% in October. Last 3 months annualized: +16.3%. CPI-Food-away-from-home: +4.8% a.r. last 3 months. Eating out is the most discretionary expenditures.
Steadily rising spending on services were keeping consumer expenditures on track with labor income (black) while spending on goods measurably slowed. But that’s no longer the case. This is a strong and confident consumer.
Yesterday:
- The Atlanta Fed’s wage-tracker numbers for November, based on census data, came out Thursday. They suggest that the battle against wage inflation isn’t yet won. Overall wage growth remains above 5%. Perhaps significantly, part-time workers — vital to the services sector, and who have had a brutally bad deal for most of the post-Global Financial Crisis era — are now registering gains in line with the rest of the workforce:
- The Atlanta Fed numbers also show that the premium for switching jobs rather than staying has widened once more, another key indicator that the market remains too tight. Add to all this the welter of anecdotal evidence that organized labor is its strongest in more than a generation, with big victories ranging from autoworkers to Hollywood writers and actors, and it’s very strange that the Fed is already declaring victory.
Yesterday’s data fuel the debate about “what happened in the last 2 weeks “ to explain the Fed’s totally unexpected pivot (see yesterday’s The Daily Edge).
- Jay Powell Dec 1: “It would be premature to … speculate on when policy might ease.”
- Dec 13: Rate cuts are something that “begins to come into view” and “clearly is a topic of discussion.”
ZeroHedge tallies all the stats (link to article for charts):
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Turning to each of these in order, we start with the ISM Services report which was a clear beat and rebound from the previous month…
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… the jobs report was an impressive beat and also a significant improvement from the previous report…
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… not to mention the unemployment rate which came in far below expected and was a big drop from the previous one (the Sahm’s Rule watchers, who were worried it would telegraph an imminent recession, could relax)…
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… average hourly earnings also came in hotter than expected (i.e., inflationary)…
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… which in turn helped the UMichigan Consumer Sentiment report, which exploded higher from 61.3 to 69.4 (smashing estimates of 62.0)…
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… as for the inflation print, well November CPI came in hotter than expected (so contrary to whatever disinflationary trend the Fed may be falling back on to justify its dovishness).
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Last but not least was today’s retail sales which came in scorching hot – the 5th consecutive beat in a row – and confirmed that contrary to what the Fed is telegraphing, the US consumer is not only not slowing but supposedly spending much more than Wall Street expected. Maybe Powell did not have that data, but he certainly had access to the same real-time card spending data that Bank of America has, and which allowed to correctly predict just how big of a beat today’s retail sales data would be.
As well as the most recent banking data as I wrote last week: “Whatever happened in October seems to have reversed in November. Growth in consumer credit slowed to +0.1% MoM in October (+3.1% YoY from +5.2% in June) but more recent banking data show revolving credit card loans up 0.6% in November, +10.1% YoY.”
So long the “data-dependant” Fed!
ZeroHedge adds that
The Wall Street Journal’s Nick Timiraos tweeted that Powell said that some members even changed their minds halfway through the meeting, when (lower-than-expected) PPI numbers came out.
Could it be that a still fairly hawkish Powell caved in to a strong majority of doves?
Or as ZH puts it:
Or maybe there is no puzzle at all: maybe what that happened in the past two weeks had nothing to do with economic data, the state of the US consumer, or how hot inflation is running and everything to do with… phone calls from the increasingly angry White House, the same White House which after seeing the latest polling data putting Biden at the biggest disadvantage behind Trump despite the miracle of “Bidenomics”…
BTW:
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2023 is 2.6 percent on December 14, up from 1.2 percent on December 7. After recent releases from the US Census Bureau, the US Bureau of Labor Statistics, and the US Department of the Treasury’s Bureau of the Fiscal Service, the nowcasts of fourth-quarter real personal consumption expenditures growth, fourth-quarter real gross private domestic investment growth, and fourth-quarter real government spending growth increased from 1.9 percent, -3.0 percent, and 3.1 percent, respectively, to 3.0 percent, 0.5 percent, and 3.6 percent, while the nowcast of the contribution of the change in real net exports to fourth-quarter real GDP growth decreased from -0.06 percentage points to -0.12 percentage points.
The FT’s headline: China’s industrial production and retail sales jump
Bloomberg’s: China’s Gloomy Economic Data Paints ‘Dire’ Growth Picture
While industrial output and retail sales expanded in November, according to the official data released Friday, those numbers were distorted by favorable comparisons to a year ago when Covid lockdowns throttled activity.
In reality, analysts said both measures of economic activity weakened last month, when compared to more typical periods. Turmoil in the property sector continued to weigh on the overall outlook, as indebted developers struggle to sell enough new homes. (…)
Hu, the Macquarie economist, said retail sales actually fell 1.9% last month from October on a sequential basis, according his calculations. That compared to double digit year-on-year growth in the official data. (…)
Real retail sales (s.a.)
New-home prices in 70 cities, excluding state-subsidized housing, dropped 0.37% from October, when they declined 0.38%, National Bureau of Statistics figures showed Friday. Existing-home prices tumbled 0.79%, the most since October 2014. (…)
“The property market slump largely continued in November as more developer defaults further damped buyer confidence,” said Liu Shui, an analyst at China Index Holdings. “Developers will likely resort to steeper price cuts to boost sales toward the year end.” (…)
Residential property sales slid 4.3% in the first 11 months, deepening from a 3.7% decline a month earlier, the statistics bureau said. Property investment shrank 9.4% in the year to date versus 9.3% previously. (…)
At least two district governments in Suzhou and Huizhou have given tacit consent to developers to lower prices more than 25% from their peaks, local news outlet Yicai reported earlier this week. (…)
The drop in values is a concern in a country where real estate accounts for about 78% of household wealth — double the US rate. Buyers also remain spooked by construction delays and developer defaults. (…)
Central Banks Signal Victory Over Inflation in Sight The ECB and the Bank of England held interest rates steady as central banks around the world move from monetary tightening to talk of rate cuts.
(…) Faster-than-expected declines in inflation over recent months and signs that economic growth and labor markets are cooling on both sides of the Atlantic have led to a rapid rethink among major central banks, which had until recently signaled a lengthy period of high rates. (…)
ECB officials agreed Thursday to hold the bank’s deposit rate at 4% for a second straight meeting. But the bank cut its inflation forecasts for next year, a sign it expects price growth to be tamed soon, and said it would accelerate its exit from a pandemic stimulus program. In a dovish shift, the ECB dropped a phrase from previous statements that “inflation is expected to remain too high for too long.” (…)
At a news conference Thursday, ECB President Christine Lagarde said policymakers wouldn’t let their guard down on inflation, and hadn’t discussed interest-rate cuts this week.
But when asked, Lagarde didn’t rule out making the roughly 1.5 percentage point of interest-rate cuts next year that are expected by financial markets. She said the ECB was making progress on meeting its inflation criteria. “A lot of indicators are showing that underlying inflation comes below expectations,” she said. (…)
The Swiss National Bank on Thursday kept interest rates on hold at 1.75% and policy makers reduced their inflation forecast for next year. That suggests the bank could cut rates as soon as March, analysts said. (…)
Investors now expect the Fed and ECB to cut rates by as much as 1.5 percentage point next year, starting as soon as March. That change in expectations has already lowered the cost of taking out new loans for the purchase of houses and other items. (…)
Canada’s Real-Estate Market Stumbles as Rate Hikes Bite Stall in new-build condominium market is likely to have far-reaching implications for Canada’s economy
Several major real-estate developers are defaulting on loans, buyers are having trouble closing on units, and dozens of condominium projects are being shelved. The effects could linger for years, turning housing, once the engine that drove the Canadian economy, into a brake that stalls growth, say developers, real-estate brokers and economists.
“It’s bad,” said Daniel Foch, a Toronto-based real-estate broker and analyst. “The people who are losing are losing really, really big.”
The strains on Canada’s residential market, which include single-family homes and condominiums, are the result of several factors, the most significant of which is an aggressive series of interest-rate hikes by the Bank of Canada. The central bank pushed its overnight rates from 0.25% to 5% in 16 months. (…)
Housing investment in Canada as a share of gross domestic product reached 8.9% in 2022, according to the Organization for Economic Cooperation and Development, much higher than the 4.8% on average for the 38 member countries in the OECD. (…)
A number of condo owners are facing “power of sale” transactions, where lenders force borrowers who have fallen behind on their payments to sell their units. The volume of such forced sales has climbed to the highest level since the mid-1990s, said Foch, who is tracking the data using numbers from the Toronto Regional Real Estate Board.
Another worrisome sign: an increase in buyer defaults. (…)
According to the Canadian Real Estate Association, home prices have risen more than 7% since January, although they are down almost 20% from their peak in February 2022.
For those who already own a home, mortgages are getting more expensive. Canadian banks don’t offer 30-year fixed-rate mortgages like in the U.S. Instead, most Canadian mortgages have five-year terms or shorter, meaning the majority of homeowners will be renewing their mortgages at much higher rates over the next few years.
The jump in interest rates over the past two years has pushed five-year mortgage rates higher to 7.09% from 4.79% in March 2022, according to the Bank of Canada, the central bank. (…)
The central bank’s quarterly survey of households, published in October, indicated mortgage payments “are close to or greater than the maximum they could handle without cutting other spending,” she said.
Canada’s housing agency estimated in a report this month that homeowners will need to renew a total of 675 billion Canadian dollars, or the equivalent of about $490 billion, of mortgage loans in 2024 and 2025. Those renewals will cause monthly mortgage payments to rise between 30% to 40%, equal to about 15 billion Canadian dollars a year diverted from consumption and savings toward debt repayment. (…)
Home sales decreased 0.9% between October and November on a seasonally adjusted basis as financing conditions remain difficult for buyers, despite a reduction in mortgage interest rates during the month. While this was the fifth consecutive monthly decline for this indicator, it was still the smallest recorded since July.
To us, this hints at a stabilization in the real estate market, at least in terms of transactions. Sales decreases were observed in 5 of the 10 provinces: Manitoba (-9.7%), B.C. (-5.5%), Quebec (-2.2%), Saskatchewan (-1.6%), and Alberta (-0.5%). On the other hand, increases were registered in P.E.I. (+11.6%), New Brunswick (+8.0%), Nova Scotia (+5.7%), Ontario (+1.5%), and Newfoundland (+0.9%).
Looking ahead, activity is likely to remain limited in the housing market, notably due to difficult affordability conditions and the weakening labour market. However, the recent decline in long-term interest rates and the strong demographic growth across the country will provide some support.
