Richmond Fed Index - New Record
It appears manufacturing activity in September was strong based on the regional Fed indexes and the Markit flash reading. There could be weakness in the service sector as was shown in the flash Markit reading.
As you can see from the chart below, the Richmond Fed manufacturing index hit a record high. This index started being calculated in 1993. The 29 reading in September beat estimates for 20, the highest estimate of 25, and the August reading of 24.
The shipments index was up 10 points to 33 and the volume of new orders index was up 9 points to 34. Local business conditions soared from 13 to 27 and capex increased 8 points to 29.
Interestingly, services expenditures fell from 12 to 5 which is similar to the Markit services PMI. We’ve seen some stats showing the manufacturing labor market has weakened.
This report shows similar results as the number of employees index fell from 25 to 16. The availability of skills needed improved from -17 to -11.
Unlike some other regional Fed reports, inflation increased as the prices paid index increased from 3.31 to 3.47. The prices received index went from 1.58 to 1.93. The wages index went from 27 to 33 which is extremely strong. Maybe the decline in hiring is related to finding qualified workers as wage growth is very strong.
It’s interesting to see how hurricane Florence seems to have had no effect on this report. The expectations index was strong, but a few components weakened.
New orders fell from 37 to 40 and local business conditions increased 6 points to 32.
Future investment expectations fell as the capex index fell 8 points to 29 and the expected spending on equipment and software fell 9 points to 32. Overall, this was a strong report which signals the September ISM PMI will be strong.
Richmond Fed Index - Very Strong Consumer Confidence
Unsurprisingly, September consumer confidence as measured by the Conference Board hit 138.4 which shows extreme optimism.
This beat the consensus for 131.7 and the high end of the range which was 134.3. August consumer confidence was revised from 133.4 to 134.7.
As you can see from the chart below, the Conference Board index is coming close to the all-time record high of 144.7 in 2000 when the tech bubble was at its peak.
The Bloomberg consumer comfort and University of Michigan indexes are showing a similarly high level of optimism.
As I have mentioned previously, even though real median income growth has been slow, consumers are optimistic. This is because of the strong labor market. A strong labor market makes workers believe they’re much more likely to get a raise than get fired.
Looking at the, Conference Board’s results on the labor market, those saying jobs are currently plentiful increased 3.4% to a strong reading of 45.7%. However, those saying jobs are hard to get increased 1.1% to 13.2%.
Another positive was the assessment of current business conditions caused the present situation index to increase 0.3 to 173.1.
On the negative side, those who see their income increasing in the next 6 months fell 2.8% to 22.6%. Those who see their income falling fell 0.4% to 6.5%.
It seems like expectations for income and the labor market have become more polarized. The expectation for future labor and business conditions increased 6 points to 115.3. It’s not a good idea to look at one component on its own when analyzing the report. Individual metrics have a lot of noise on a month to month basis.
Richmond Fed Index - Retail Sales Growth Should Be Strong
Buying plans for cars increased 0.4% to 13.4% and buying plans for houses increased 0.3% to 6.6%, but buying plans for major appliances fell slightly to 52.9%.
It’s interesting to see buying plans for housing increase since housing reports have been weak recently. Existing home sales in both July and August were down 1.5% year over year.
They have missed estimates 5 months in a row. I’m not changing my expectations for the housing market based on this subcomponent. That being said, I’m also not bearish on retail sales.
As you can see from the chart below, year over year retail sales growth has correlated with consumer confidence. The problem for the rest of the year could be that oil prices eat into other retailers’ sales.
We’ve already seen strong same store sales growth at gas stations. This could accelerate that growth, pushing down the strong restaurant sales growth and growth in other areas.
Richmond Fed Index - What This Means For Stocks
Since 2009, consumer confidence and the stock market have a 97.4% correlation. Confidence and stocks have been soaring. In the Conference Board survey itself sentiment about the stock market improved.
The number of bulls increased 2.7% to 42.5% and the number of bears fell 1.3% to 22.4%. Consumers see the writing on the wall with interest rates as 68.2% expect them to increase and 6.8% expect them to decrease.
Some investors have been bearish based on heightened confidence since late 2016, but it hasn’t worked out. The question about confidence is how high is too high.
In the long term confidence is always going to fall along with the market after it gets extremely high. But in the mean time the optimism and bull market has continued. I don’t view optimism as a catalyst.
The bearish argument is seen in the graphic below. The chart shows the returns of the S&P 500 every time optimism has been above 120. Since October 1968, there have only been two markets where this has occurred. Thee are the late 1960s and late 1990s.
The returns in the next year are -7.21% with a 25% win rate. It’s great to see how rare this occurrence is. On the one hand, it’s tough make a bet based on two other markets. On the other hand, returns are good when confidence is low. This provides more evidence to support the point that returns get worse as optimism increases.
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