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
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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.”