Weak US Retail Sales, Factory Data Heighten Recession Concerns
The value of overall retail purchases broadly decreased 1.1% in December after a downwardly revised 1% drop in the prior month, Commerce Department data showed Wednesday. Separate figures showed a 1.3% decline in factory output last month that wrapped up the weakest quarter for manufacturing since the onset of the pandemic.
(…) So-called control group sales — which are used to calculate gross domestic product and exclude food services, auto dealers, building materials stores and gasoline stations — dropped 0.7%, the most in a year. (…)
Taken together, the data show a consumer that’s losing steam and business investment falling, portending weaker growth and raising concerns that the economy may be inching closer to a recession. Combined with easing inflation, the figures put the Fed on track to further slow the pace of interest-rate hikes. (…)
The two consecutive -1% down bars in the chart above are a spooky rarity in the U.S.. As I show below, -2% in 2 months has only occurred in recessions and were always followed by at least 2 more down months.
But because of the severe goods deflation underway, the recent nominal retail sales data can be misleading to the unwary.
There is no official retail sales deflator but a weighted sum of CPI-Durables (33%) + CPI-Nondurables (67%) provides a decent approximation of “CPI-Retail”. In December, CPI-Retail prices declined 1.1% after -0.3% in November.
So inflation-adjusted retail sales were actually unchanged in December following -0.7% in November and +0.7% in October.
The very spotty quarter ended with nominal retail sales up 6.8% YoY in Q4 (6.0% in December), down considerably from 9.4% in Q3, 8.4% in Q2 and 12.6% in Q1 but still well above the 4.5-5.0% average growth in retail wages.
Retail profits in Q4 will thus be negatively impacted by heavy markdowns but operating expenses will not make things worse, thanks also to the 3.1% decline in weekly hours worked by retail employees in Q4 (-4.1% in December) and lower energy costs.
Crucially, Christmas was not a disaster economically when considered in real terms, enabling retailers to reduced part of their excess inventories during the biggest retail month of the year.
The National Retail Federation said Wednesday that holiday sales were disappointing with November and December sales up 5.3% YoY. My CPI-Retail data puts inflation at 5.9% during these two months, implying real sales were down 0.6%, right in line with my data.
(…) Industrial production decreased 0.7 percent in December and 1.7 percent at an annual rate in the fourth quarter. In December, manufacturing output fell 1.3 percent amid widespread declines across the sector. (…) total industrial production in December was 1.6 percent above its year-earlier level. Capacity utilization dropped 0.6 percentage point in December to 78.8 percent, a rate that is 0.8 percentage point below its long-run (1972–2021) average. [view full report]
More importantly,
Manufacturing production declined 1.3% in December, well below consensus expectations. The capex-sensitive business equipment category decreased 2.0% and mining production decreased 0.9%, while the utilities component—an input into consumption in the GDP accounts—increased 3.8%, as cold temperatures increased demand for heating.
Total motor vehicle assemblies declined 1.1% to an annual rate of 10.0 million (vs. 10.9 million on average in 2019). The decline in motor vehicle assemblies likely reflects a planned temporary slowdown in production, as Wards production schedules had shown planned declines in auto assemblies for both November and December.
David Rosenberg tweeted yesterday: “Sorry, folks. No soft landing. On track for 3 straight quarters of declines in real retail sales alongside 2 successive negative production numbers. Only happens in recessions.”
Sorry David, not necessarily. In 2015-16, both sales and manufacturing were quite weak and the economy kept growing on a YoY basis.
N.Y. Fed’s Business Leaders Survey
Yesterday, we got the very weak manufacturing survey. Services are not much better:
Activity continued to decline significantly in the region’s service sector, according to firms responding to the Federal Reserve Bank of New York’s January 2023 Business Leaders Survey. The survey’s headline business activity index fell four points -21.4, its lowest level in nearly two years.
The business climate index came in at -41.8, suggesting the business climate remains much worse than normal.
Employment growth slowed to a crawl, though wage increases remained widespread. The pace of input price increases continued to trend lower, while the pace of selling price increases moved slightly higher. Looking ahead, firms do not expect conditions to be better in six months.
Fed’s Beige Book Says Businesses Expect Weak Growth in Months Ahead Inflation showed some signs of easing while labor-market conditions remained tight, Federal Reserve’s business contacts report
Half of the Fed’s 12 regional banks reported no change or slight declines in economic activity in their districts, with several others reporting slight or modest growth and one saying it had a significant decline.
Some retailers “noted that high inflation continued to reduce consumers’ purchasing power, particularly among low and moderate-income households,” according to the central bank’s latest compilation of economic anecdotes from around the country, known as the Beige Book.
The Fed said most regions benefited from a slight increase in consumer spending during the holiday season. Many business contacts said it had become more difficult to pass higher costs to consumers, “suggesting greater price sensitivity on the part of consumers.”
“Selling prices increased at a modest or moderate pace in most districts, though many said that the pace of increases had slowed from that of recent reporting periods,” the Fed report said.
The report included information gathered through Jan. 9. (…)
Labor-market conditions remained tight for many businesses, the report said, and many of them “hesitated to lay off employees even as demand for their goods and services slowed and planned to reduce head count through attrition if needed.” (…)
Wage pressures persisted for several businesses and many in the Richmond Fed’s district “reported being at a breaking point on increasing wages as they cannot pass through costs anymore to consumers.” (…)
In the New York Fed’s district, the only one that reported a significant decline in economic activity, manufacturers “wound up 2022 on a bleak note, reporting the most widespread decline in activity since early in the pandemic.” (…)
Producer Price Increases Decelerated in December Supplier prices rose 6.2% last month from a year earlier, the slowest pace since March 2021
That was down from November’s revised 7.3% increase and well below the 11.7% rise in March 2022, the fastest pace since PPI records began in 2010.
Core PPI, excluding often-volatile food, energy and supplier margin categories, rose 4.6% in December from a year earlier, down from 4.9% in November, the department said.
On a monthly basis, the PPI declined 0.5% in December from November, the first monthly decline since August. Supply-level energy prices fell sharply last month while food prices decreased modestly. Core PPI, excluding often-volatile food, energy and supplier margin categories, rose 0.1% last month compared with 0.3% in November. (…)
It is up 4.6% YoY, down from 4.9% in November.
PPI-Final demand-core goods is up only 1.5% a.r. in the last 4 months but 3.0% a.r. in the last 2 months.
PPI-Services keeps behaving very well, up 0.1% in December in sharp deceleration since the 0.5% print in August.
Two Fed Officials Back Quarter-Point Rate Rise Next Month
- Fed policy makers are starting to show differing opinions on the path for US interest rates this year. Two voting regional governors have backed moderating the pace of rate rises, while two other Fed officials have stated a preference for additional hikes. Dallas Fed President Lorie Logan and Philadelphia Fed chief Patrick Harker laid out the case for easing the Fed’s hiking campaign in comments on Wednesday, which followed a weak retail sales report. Meanwhile, St. Louis Fed chief James Bullard and Loretta Mester of the Cleveland Fed — also speaking on Wednesday — stressed the need to keep policy restrictive for longer. (Bloomberg)