Chicago Fed National Activity Index Dragged Down By GM Strike

University Of Michigan Consumer Confidence Falls In Final Reading

Final October University of Michigan consumer confidence reading fell from the initial reading. But it was still up sequentially. It’s interesting to see such optimism as the weekly Redbook same store sales reports have recently showed a decline in yearly growth. A final determination of how strong the consumer was in October will be made by the retail sales and PCE reports as always. 

Most investors expect solid, but unspectacular results. If consumers are less concerned abut the trade war, then they can spend the extra money they saved in September.

You may not think consumers should be less concerned about the trade war because phase 1 of the deal hasn’t been finalized, but in the University of Michigan survey, 27% mentioned tariffs which was down from 36% in the previous month. Trade war concerns are going away just in time for the holiday shopping season. A rising stock market should also inspire confidence.

Question is if the labor market weakens enough to cause concern about income growth. I’m waiting to see if the weakness in the Markit employment PMI correlates with a weak monthly jobs report. Consensus sees some of the weakness Markit sees as it expects total job growth to fall from 136,000 to 90,000. Range is from 50,000 to 155,000. Part of that sequential weakness is from the government as private sector job creation is expected to fall from 114,000 to 90,000. The government is expected to create zero jobs.  

October's final consumer confidence index was 95.5 which missed estimates and the initial reading of 96. On a sequential basis, the current economic conditions index rose from 108.5 to 113.2. It was up 0.1% yearly. Consumer expectations index rose from 83.4 to 82.2. That’s a yearly decrease of 5.7%. 

Only 2% of consumers mentioned the impeachment and less than 5% mentioned the GM strike. The recent end of the GM strike probably won’t help consumer confidence much in November since so few mentioned it in this survey.

If the impeachment happens, it probably won’t hurt consumer sentiment. The 2020 election will cause uncertainty either way. Another aspect included in this survey is that buying conditions for vehicles and houses are low. Yes, I get the concept that housing is expensive. However, wage growth is strong and interest rates are low. These positive trends explain why housing data has improved in the past couple of months.

Weak Chicago Fed National Activity Index

It’s no surprise the Chicago Fed National Activity index was negative in September since the quarterly GDP estimate for Q3 is just 1.6%. The economy is clearly in a slowdown. August reading was revised up from 10 basis points to 15 basis points. But the 3 month average stayed negative as the September reading was -0.45. 3 month average is now -0.24 (fell from -0.06). September’s reading was the weakest since April.

As you can see from the chart below, the 3 month moving average isn’t at the 2019 low, let alone the cycle low. The economy is in a contraction when the 3 month moving average falls below -0.70. There have been very few economic reports and basically zero hard data reports consistent with a recession. Those calling for a recession think the hard data will be revised lower. 

Clearly, very few investors agree with that thesis because the stock market is at a record high. This report was hurt by the production category. It fell 0.4 because of the sharp decline in vehicle production related to the GM strike. Besides that category, the others were down slightly. Since the GM strike is over, the October Chicago Fed index might show less of a decline. This further supports the narrative that there is no recession coming soon.

Dallas Fed Manufacturing Index Declines

Now that the Dallas Fed manufacturing report came out, we have all the regional Fed manufacturing reports from October. Since the Dallas Fed report showed sequential weakness, I’m not as optimistic about the ISM PMI. I see it coming in close to 50. The report comes out this Friday. Consensus is for it to rise from 47.8 to 49.3. I definitely see it increasing. 

If it doesn’t, recession calls will increase. The first time it rises back above 50, whether that’s in this report or a future one, calls for a cyclical manufacturing recovery in 2020 will increase. Many see that as a possibility, but we don’t have enough evidence to support such a thesis yet.

Current Dallas Fed production index fell from 13.9 to 4.5. As you can see from the chart below, the general activity index fell from 1.5 to -5.1 which missed the consensus of 1.2 and the low end of the estimate range which was -2. New orders index fell from 7.1 to -4.2. Growth rate of orders index fell from 4.4 to -5.9. Shipments index fell 8.7 points to 6. This was a pretty weak report as 9 out of the 14 indicators fell. Outlook index somehow rose from 7.4 to 8.8. And, outlook uncertainty index fell 1.2 to 12.1.

Now let’s look at the expectations category and the comments section. Oddly, expectations showed a lot of improvement. Expected new orders and production indexes were up 10.4 and 4.2 points to 34.3 and 29.6. 11 out of 13 categories increased. Outlook and general business activity indexes rose 12.9 and 9.2 points to 15.3 and 2.4.

The comments section in this report was mixed as a computer and electronic product manufacturing firm actually praised the trade deals saying, “Trade deals are actually helping our customers and, therefore, helping us to book more revenue. Our backlog is pretty strong. There is a mild slowdown in a couple of sectors of our industries—nothing alarming.” 

Most firms were negative though as a nonmetallic mineral product manufacturing firm stated, “There is a lot of uncertainty that is causing us to delay capital expenditures. Raw materials costs are uncertain due to unknown duties impacts. Planning is difficult and getting more uncertain. There is a lot of uncertainty in the homebuilding business, which directly affects us.” Housing market index has been strong, so this negative comment is surprising. 

Spread the love

Comments are closed.