University Of Michigan Consumer Confidence Improves
The University of Michigan consumer confidence index improved again in October. That’s 2 months of improvements assuming the preliminary reading is near the final reading. These increases came after the sharp decline in August because of the trade war. That weak reading was correlated with real personal consumption growth, but not with the solid retail sales report.
Next Wednesday we will get the September retail sales report. And PCE report comes out on October 31st. Those will tell us how accurate the modest improvement in the confidence survey in September was. With this improvement in October, the bulls should hope it is accurate.
Specifically, the sentiment index was 96 which beat estimates for 92 and the high end of the estimate range which was 93.7. This was up from 93.2 in September. It shows how bearish expectations were. Few economists expect an increase. We sholdn't blame economists because we expected weakness as well since the trade war got worse.
As you can see from the chart below, this was the biggest estimate beat since 2013. In summary, nothing seemed to go right (cyclical weakness & worsening trade war), other than the labor market staying strong, yet the sentiment index increased modestly.
Consumers Extremely Optimistic About Real Income Growth
Overall consumer confidence index increased 3% monthly and fell 2.6% yearly. Current economic conditions index rose from 108.5 to 113.4. That’s a 4.5% monthly increase and a 0.3% increase from last year. Expectations weren’t up as much as the index went from 83.4 to 84.8 which is a 1.7% increase. The index was down 5% yearly.
That decline explains the increased gap between the current index and expectations. Bears have been saying this gap signals a recession. However, expectations are still relatively positive. I don’t see a sustained big decline in real consumption growth coming this holiday season. Results partially depend on how the potential partial trade deal works out.
It's surprising that the impact from the tariffs declined slightly. 29% of consumers cited the trade war as a negative which was down from 36%. It will be interesting to see if the potential partial deal helps this fall further. If it does fall, confidence will certainly be strong.
Consumers are extremely optimistic about their real income. Low inflation and high income growth expectations caused the highest net percentage of consumers expecting real income growth in 20 years. You can see this in the chart below. Real wage growth fell in September, but it was still positive. CPI was 1.7% and average real weekly wage growth was 2.6%.
So-called impeachment proceedings weren’t mentioned by many consumers. That’s probably because those who think the impeachment is a good thing think Trump’s economic policies are bad. Meaning it won’t be a negative if he’s impeached. Those who think he won’t be impeached probably think it’s good for the economy that he stays in office.
Impeachment proceedings were mentioned by consumers about half as much as the GM strike. 3% mentioned the impeachment and 5% mentioned the GM strike. Many investors believe the GM strike is a bad signal for the economy because prior strikes occurred before recessions. Timing makes sense because if GM sees declining sales, it won’t want to raise wages to meet the market price. At the end of cycles, auto sales start to fall and wage growth is strong.
Economy Not That Weak
The economy is in a slowdown, but not in a recession. If someone is calling for a recession, I will sound like a bull. If someone says the economy is doing amazingly, I will sound like a bear. The chart below supports my thesis. As you can see, the weekly activity index shows real yearly GDP growth will be about 2.25%.
That’s close to Cornerstone Macro’s Q3 estimate of 2.1%. The chart shows the slowdown isn’t nearly as bad as 2016, but growth is off the 2018 peak. This relative strength compared to 2016 is a bit more optimistic than the ECRI coincident index which had growth at 1% in 2016 and 1.8% in August. I’m guessing the September coincident index will show 1.7% or 1.6% yearly growth. To be clear, the coincident index isn’t scaled in GDP percentage points like the activity index.
Weekly activity index is based on initial jobless claims, mortgage applications, federal spending and tax receipts, oil prices and crude production, rail loads, retail sales, the Evercore ISI trucking, temporary workers, and diffusion surveys, steel production, the trade weighted dollar, and Bloomberg’s Consumer Comfort index. As you can see, this has 15 components. It’s in depth and open about its components which is why I like it.
ECRI Leading Index Falls, But Growth Improves
As you can see from the chart below, the ECRI leading index’s growth rate improved from 0.8% to 1.1%. It improved even though the overall index fell from 146.1 to 145.4. Growth is easy to achieve because the comp is easy. It will get much easier over the next few weeks.
Having the strongest growth in the past 12 months doesn’t mean the economy will be strong in 1H 2020 because these comps will be so easy. I won’t be optimistic unless the index rises on an absolute basis.
Atlanta Fed GDP Nowcast updated on Wednesday to show 1.7% Q3 growth. That’s exactly in line with the average and median of 12 estimates. Growth will probably be between 1.7% and 2.2%. NY Fed’s model stayed exactly the same this week as it sees 2.03% growth.
Estimate for Q4 stayed at 1.3% which is obviously very pessimistic. St. Louis Fed Nowcast, which is almost always optimistic, expects Q3 growth to be 3.34%. This estimate is so high, I can’t see any way it is accurate. To be clear, growth could be in the high 2% range. But I can’t see any scenario where growth is above 3%. Advanced Q3 growth reading comes out October 30th. There are 2 more estimates coming from the NY Fed Nowcast.
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