New Business Falls For The First Time In 10 Years

Weak October Motor Vehicle Sales

October motor vehicles report was disappointing. Motor vehicle sales have plateaued in the past few years as you can see from the chart below. This October weakness isn’t the sign of a new downtrend. But it does mean retail sales growth will be hurt by the motor vehicles and parts segment of report. That’s the largest component of retail sales as it has about a 20% share. 

Non-store sales growth will need to be great for this retail sales report to be strong. Good news is economists will factor in this motor vehicles sales report into their estimates for retail sales growth, so a disappointment isn’t more likely. Retail sales reports come out on Friday November 15th. Estimates aren’t out yet. They come out next week.

Specifically, total vehicle sales in September were revised from 17.2 million to 17.1 million. In October, sales fell to 16.5 million which missed estimates for 17 million and the low end of the estimate range which was 16.8 million. This year, average monthly sales are 16.9 million which means October’s report was below average. 

Sales were 17.2 million and 17.1 million in the past 2 years which means this year has had a slight dip lower. There’s no trend change, but this impacts retail sales growth as I mentioned earlier. This weakness is in line with the University of Michigan data which showed consumers think now is a bad time to buy a vehicle. Finally, domestic vehicle sales fell from 13.4 million to 12.7 million.

Factory Orders Growth Misses Estimates

Factory Orders report is an update of the durable goods orders report and adds in new data from non-durable goods. In September, monthly factory orders growth was -0.6% which missed estimates for -0.5% and fell from -0.1%. Durable goods orders fell 1.2% instead of 1.1% and non-durable goods orders were up 0.1%. 

Inventories were up 0.3% and shipments fell 0.2%. Orders for commercial aircrafts fell 11.8% because of the grounding of the Boeing 737 Max. Core durable goods orders fell 0.6% instead of 0.5% which is obviously very bad news.

Big Improvement In Redbook Sales Growth  

After a few modestly weak Redbook same store sales growth readings in October, growth improved in November. In the week of November 2nd, same store sales growth increased from 4.5% to 5.5%. That’s a solid reading. October reports imply retail sales growth in October will be weak. That’s in tune with the motor vehicle sales report. 

Good news is November is much more important than October because of the holiday shopping season as Black Friday is November 29th. Cyber Monday is in December, so there will be some sales shift to December. Because of the weak December comp and the timing of Thanksgiving, retail sales growth could explode this December.

As you can see from the chart below, the Gallup poll shows Americans’ early spending plans for Christmas are up big from last year. They’re up from $885 to $942 which is a 6.4% increase. Last October, expected spending fell 2.3%. Last year, the consumer had to deal with a hawkish Fed which sent stocks down, the government shutdown, and worries about the trade war. 

Now the consumer has a higher savings rate as it is 8.3% versus 7.5%. Plus, gas prices are low, the unemployment rate is low, real wage growth is positive, and there is less uncertainty surrounding trade as phase 1 of the trade deal is almost done. This explains why 37% of consumers plan to spend more than $1,000. It compares to 33% planning to spend that amount last year. Current expected spending is the highest ever as it surpassed the projection in 2007 for the first time.

Last fall, investors were expecting the consumer to have a strong holiday season and it be the last good one of the cycle. That was before the big dip in stocks. Now many have changed position on the yield curve because of the way the inversion occurred. Personally, I don’t see the cycle ending soon.

Divergent Service Sector PMIs: Markit PMI Was Weak

Both the Markit and ISM manufacturing PMIs improved slightly. However, the services Markit PMI fell slightly and the ISM non-manufacturing PMI improved decently. Let's look at the Markit PMI specifically in this article.

As you can see from the chart below, the services PMI was the weakest since February 2016. The October PMI fell from 50.9 to 50.6 which is down significantly from the flash reading of 51 (51 was the consensus). That means in the 2nd half of month had a PMI of just 50.2. 

There have only been 2 very brief periods where the PMI has been below 50 this expansion. Weakness in the service sector caused the composite index to fall from 51 to 50.9. Even though the manufacturing PMI improved 0.2 to 51.3.

New business index also was weak. It fell below 50 for the first time since the data started being collected 10 years ago. New export orders fell for the 3rd straight month, but the rate of decline lessened slightly. It was the 2nd worst reading in its history (started in September 2014). 

Decline in employment increased as this was the worst reading in almost 10 years. Backlogs fell for the 3rd straight month. The slight rise in prices paid was the first increase since July. Prices received were flat which ended a 2 month streak of declines. 

Surprisingly, even though this report was mostly weak, the output outlook for the next year improved slightly to a 4 month high. New service lines and low rates caused firms to be more optimistic.

Composite PMI is consistent with just 1.5% GDP growth which in line with the median of 8 estimates for Q4 GDP growth. This is another Markit report that shows weakness in the labor market. That’s dramatically different from the recent BLS report. It beat estimates and had strong positive revisions in the prior 2 months. 

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