Remember, consumption almost always leads production growth. It takes awhile for factories to adjust to changing consumer demand. Stunningly strong sales of durable goods in February and March didn't really translate into really strong production numbers until April, and production growth rates didn't peak until June. Notice, too that consumption went into growth mode in October of 2009, while production didn't pass that important benchmark until four months later in January 2010.
Given that May consumption of durable goods was actually down, and month-to-month growth has been anaemic since then, I don't think production is going to look particularly strong in the months ahead.
Both the Empire State Manufacturing report and the Philly Fed Manufacturing report continued right on the cusp between growth and shrinkage. The Philly Fed report improved a little, to negative 0.7 from negative 7.7, while the Empire State report dropped to 4 from 7 when comparing the September report with August's data. For both reports zero demarcates growth from shrinkage. These numbers are usually pretty decent indicators of the national data due several weeks later. However, last month the national data improved, while these two reports showed a worsening. I am not sure how long the national data can outrun the local data, so I suspect the national ISM report will show some softening when it is announced in a couple of weeks.
Strong exports from the likes of Caterpillar, Deere, and Danaher will cushion the production numbers some, but U.S. consumption numbers are a considerably larger part of the industrial production equation. I view the short-run slowing in manufacturing as an echo of the late spring slowdown in consumption and not new information about the direction of the economy. Also keep in mind that consumption is still up--the growth rate is just slowing. Most likely, that should keep production out of negative territory. Better exports and a potential shift in consumer spending to domestic goods and, to a lesser degree, private investment spending, may aid production in the months ahead. Nevertheless, the direction of consumer incomes and consumer spending will be where I keep my eye focused in the months ahead.
Retail Sales: Has the Yo-Yo Come to Rest?
On that front, the Census Department retail sales report for August was a positive surprise, with overall growth of 0.3% in July and 0.4% in August and its best showing since March.
The census report is a tad more volatile than some of the other retail reports that I look at because it is not inflation-adjusted and includes highly volatile auto and gasoline sales.
Like almost every other retail indicator, February and March were absolute blowouts followed by a three-month hangover that ended in June. July and August finally showed a little stability at a modest growth rate. If we're able to maintain a similar growth rate in September, there is a real possibility that the consumption component of the GDP could be over 2% compared to 1.9% and 2.0% during the first and second quarters. No double dip here, but no rocket ship upward either.
Digging deeper, the growth rates in individual categories were more diverse than they have been in some time. Generally lower-priced goods and necessities fared well, while more discretionary and higher-ticket items languished. Consumers continue to spend, but very cautiously and very selectively.
The slowing in the electronics category might actually be a good thing as consumers shift their attention to more domestically produced goods and services. Recall that a flood of imports was a real drag on second-quarter economic growth. Consumer spending on imported goods also reduced the industrial production numbers above.
A couple of company reports last week speak to what is happening in the broader economy. While Best Buy's report was well-received because of strong earnings per share results and raised guidance, the details were fascinating. Sales came in a bit light, but because of fewer promotions and cost controls, earnings per share beat expectations. It seems the minute store promotions dry up, consumers pull in their horns. Flat panel TVs and computers, both of which have high amounts of non-U.S. content, are clearly slowing. Meanwhile products with an Internet or cable promotion seem to be doing better. Smartphones and mobile devices are doing particularly well. This will eventually lead to better service revenues for the broader economy. Best Buy also noted that sales could have been even better had they been able to get a hold of more Apple products.
Grocer Kroger reported sales growth of 6% for the most recent quarter, a real standout in the relatively dismal grocery industry. The company noted that some of the worst effects of food deflation may have finally washed through the system (food prices were up 0.2% in August after four months of flat or declining prices). Morningstar's retail team believes that part of Kroger's success is based on a larger than average emphasis on private label goods and a greater emphasis on price than many of its competitors. So even on staples, the consumer remains weary.
Real Estate News Dominates the Week; Are Durables in Decline?
This week we get the trifecta of housing news, including housing starts, new home sales, and existing home sales. These numbers have been dreadful over the past several months due to the effects of the expiring tax credit. The consensus forecast is for starts to be down modestly (anecdotal evidence from selected homebuilders), while new sales could eke out a small gain. Existing home sales have a good possibility of being up based on a better pending home sale number last month. The increases or decreases in all of these categories should be relatively modest. It is pretty clear that housing isn't going to help the economy in the short run. On the other hand, some of the housing numbers are so small relative to the size of the economy that they can't hurt the economy much either.
Based on the new orders component of the various purchasing managers' reports, the market is bracing itself for a 0.3% decline in durable goods orders for August. As we note above, the frightened consumer has been afraid to spend on big ticket items for some time. It will be interesting to see if the consumer pullback leads businesses to reduce their orders for capital goods, too. A softer capital goods component wouldn't come as a huge surprise (the number is highly volatile and surprisingly difficult to forecast), given that capital spending lags consumer spending even more than production. Potentially this is yet another echo of last spring's growth mirage and not a new voice from the wilderness.
