Retail sales in August were disappointing. Sales ex volatile auto’s and gasoline fell .1% for a 2nd straight month and that was below the estimate of up .3%. If you also take out building materials to get to the so called ‘control group’, core sales also fell by .1%, well below the estimate of up .4% and July was revised down by .1%. As for auto sales, they fell by .9% m/o/m but are still up 3.9% y/o/y. The sales of building materials fell for a 2nd month. The bright spot has clearly been online retailing and even that saw a m/o/m decline of .3% even though the y/o/y rise is still a robust 16%.
Bottom line, core sales are up just 2.8% y/o/y which is the slowest pace of gains since March. To put this level into perspective, the 5 yr average is 3.5%. The average seen in the mid 2000’s mortgage equity withdrawal bubble was 5.4% and the late 1990’s average was 5.6%. I’m going to blame the following for this punk level of retail sales:
- higher healthcare spending is taking up a greater share of household spending
- higher rental costs for the biggest percentage of households that are renting in 50 years
- for those that own, lower mortgage costs are offset by rising property taxes
- a reluctance to add too much debt as while credit card debt is approaching $1T again it is still below the level seen in 2008
- savers, particularly retirees, are saving more to offset the lack of interest income thanks to the Fed
- many millennials are swamped with too much student loan debt
- and parents are themselves dealing with high tuition costs for those that are paying out of pocket for their kids
- wage growth that is still only modest, notwithstanding the greater share it is now taking out of corporate profits.
Initial jobless claims totaled 260k, little changed with the 259k seen last week and was 5k below the estimate. The 4 week average was little changed at 261k. Continuing claims, delayed by a week, were also little changed. Bottom line, employers are reluctant to trim payrolls because at this aged state of the economic recovery it has become much more difficult to find good workers. The NFIB the other day saw a sharp increase in Positions Not Able To Fill. This story remains the same.
The first two September industrial numbers out were mixed and which follow the below 50 August ISM manufacturing index print. The NY manufacturing index was still in contraction at -2.0 vs -4.2 in August, about in line with the estimate of -1.0. The internals though were even worse. New orders fell to -7.5 from +1.0. That is the weakest since February. Backlogs fell to -11.6 from -9.3. Employment was very weak at -14.3, near a 7 yr low. The six month outlook was more positive for business conditions as this component rose to 34.5 from 23.7 with capital spending plans rebounding after August weakness.
The Philly index on the other hand rebounded to +12.8 from +2.0 and vs the estimate of +1.0. The internals were also mixed with shipments, backlogs, delivery times, inventories, employment and the workweek all negative and new orders barely positive at 1.4. The six month outlook fell 8 pts but after rising by 12 pts in August. Capital ex plans fell.
August PPI was flat headline m/o/m, up .1% ex food and energy and higher by .3% ex food, energy and trade. The core rate is higher by 1% y/o/y and 1.2% if we also take out trade. Bottom line, the story here is the same where we see wholesale goods deflation of .4% ex energy and 1.6% ex food while services ex trade prices are up by 1.4%. Either way, the market cares much more about tomorrow’s CPI where the core rate is expected to have a 2 handle on it for the 10th straight month.
After the Q2 inventory destocking seen in the GDP data, July started with no m/o/m change in business inventories. The estimate was for a one tenth gain. The y/o/y rise was just a .5% vs the five year average of 4.2%. Sales fell by .2% but the inventory to sales ratio held at 1.39, not far from the highest level since 2009. Specifically with auto’s as that has been a main driver of growth in recent years, the I/S ratio fell to 2.23 from 2.28 in June and vs 2.09 one year ago.
Bottom line, with weakness in retail sales, IP and this modest miss in inventories, expect a rash of Q3 GDP estimate cuts. The interesting response though in US Treasuries is the further steepening in the yield curve with the 10 yr yield back to 1.71% but we can argue that it is happening more in response to the selling in European sovereign bonds today. The German 10 yr yield got as high as .05% today. It’s obviously ridiculously low but the point is that the game of hot potato in holding negative yielding and close to negative yielding securities in hopes that they can be flipped to some greater fool is now burning people.