Very Strong Retail Sales
September retail sales report was so strong, it surprised many. It seems like the labor market started to slow in October compared to September, but this was a good report. Consumers were helped by the delayed extra benefits that they got in September. Many states gave out $300 per week. Since the money was backed up for a few weeks, it came in one large check.
That makes it just like the $1,200 stimulus checks except this was to unemployed people. We can predict that October won’t be as strong. Another thing to consider is that September had more back to school shopping because school starts were delayed. This reading probable doesn't signal the holiday shopping season will be robust. For that you can look to jobless claims.
This was a fantastic report as there was 1.9% monthly growth in retail sales which destroyed estimates for 0.7% and last month’s 0.6%. Vehicles certainly boosted spending as monthly growth without them was 1.5% which still destroyed estimates for 0.3% and August’s 0.5%. Excluding gas and vehicles growth was 1.5% which beat estimates for 0.4% and last month’s 0.5%.
Finally, control group sales had monster growth on top of a very weak comp. Growth was 1.5% which beat estimates for 0.2% and last month’s -0.4%. It's surprising the consensus estimate was that weak considering the easy comp. Economists were out in left field on that prediction.
Yearly retail sales growth excluding food services was a massive 8.2% which was the highest since June 2011. Strongest parts of this report were clothing, sporting goods, food services and drinking, and motor vehicles and parts. A delayed back to school season boosted shopping for clothes in September. There was 10.95% monthly growth in spending on clothing as the chart above shows. That brought yearly growth up to -12.46%.
Sporting goods sales growth was 5.75% which brought it to 14.37% yearly growth. The area is still hot as people spent more time outside because of social distancing. This data is seasonally adjusted, so we won’t see the impact of the colder weather. Apparently, the decline/delay in school sports didn’t matter.
Food services and drinking had 2.07% growth which brought yearly growth to -14.45%. Most don’t think that will be repeated in October. It might get worse as the weather gets colder. That drop alone could actually sink the overall reading if it’s large enough. This category is 12.39% of sales, making it the 3rd biggest.
Biggest, which is motor vehicles and parts had 3.6% growth which translated into a massive 10.88% yearly growth rate as people bought cars because public transportation was deemed unsafe and, in some areas, shut down.
In comparison to February, restaurants and bars are still down 14.9% and online sales are up 21.6%. Online sales growth wasn’t great as people switched back to in person shopping and the comp was tough. Monthly growth was only 46 basis points. However, yearly growth was 23.81% because most of the change in habits stuck.
COVID-19 still impacts consumer behavior. It’s just that in rate of change terms, it’s not changing behavior much more which makes sense because COVID-19 deaths have fallen. Some people have gone back to work in offices. It’s not that dangerous to shop in stores compared to other activities such as concerts.
Consumer Sentiment Rises
As you can see in the chart below, consumer sentiment in the University of Michigan survey rose from 80.4 to 81.2 which goes against my pessimism for October. However, that rise was completely due to the spike in expectations. Current index fell from 87.8 to 84.9. You can see why people would be confident about the future, especially if they are a Democrat. COVID-19 crisis will be in the rear-view mirror.
If you are a Democrat, you potentially get your guy in office. Expectations index was up from 75.6 to 78.8. Expectations for a Biden victory increased modestly which makes sense because he is doing well in the polls. Specifically, from July to September, biased polls thought 48% thought Biden would win and 47% thought Trump would win. In October, 52% thought Biden would win and 45% thought Trump would win.
Weak Industrial Production Report
We got a great retail sales report and a very poor September industrial production report as monthly growth was -0.6% which fell from 0.4% and missed estimates for 0.6%. This was much different from the regional Fed surveys which were all very strong. Investors are shocked by this.
Industrial production is 7.1% off its high as yearly growth actually fell from -7% to -7.3%. That was the 2nd straight decline in yearly growth. You can see the reversal in the chart below. Capacity to utilization rate was down from 72% to 71.5% which missed estimates for 71.9%. To be fair, it rose one tick from the original August reading.
industrialactivity CHART
Manufacturing growth was -0.3% which missed estimates for 0.8% and fell from 1.2%. It is 6.3% below its pre-COVID-19 level. At least here yearly growth rose from -6% to -5.7%. As you can see from the chart below, a slightly lower percentage of manufacturing industries are contracting. Ironically, manufacturing was constrained by autos (& electronics).
Autos had strong retail sales, but weak manufacturing growth. Some of the strength in autos isn’t seen in either report as used car demand exploded after the pandemic. Mining growth was 1.7% as it was helped by oil and gas. Even the weakest area of the economy found a bottom. Utilities production was down 5.6% because of weak air condition demand. Obviously, that’s not a worry as the weather changes each week.
Conclusion
Retail sales report was fantastic, but weaker results loom in October as the benefit from higher unemployment benefits will be lower. Some states actually limited their $300 in weekly benefits. Furthermore, the labor market weakened. Consumer sentiment improved, but current conditions fell.
Industrial production report was poor. One of the only areas that was good was mining as oil and gas found a bottom albeit at very low levels. U.S. oil production is down from about 13 to 10.5 million barrels per day.
Recent Comments