Orlando's Outlook: Retail redemption

10-13-2017

Bottom line After a dreadful August, retail sales enjoyed a powerful 1.6% nominal surge in September, the largest month-over-month (m/m) gain since March 2015, due to hurricane-related bounces in retail gasoline sales, autos and building materials. In addition, July and August results were revised higher across the board. So with a strong September now in the books, this recent retail sales strength salvages the important Back-to-School (BTS) season, whose sales rose a solid 3.9% on a year-over-year (y/y) basis, marking the best period in three years.

Let the rebuilding begin It’s been a hurricane season for the ages so far, with another month or so still on the calendar. While the arrival of hurricanes Harvey and Irma in the back half of August negatively impacted auto, gasoline and building material sales, those categories have rebounded with a vengeance in September:


  • Autos Total vehicle sales plunged nearly 4% in August to 16.03 million annualized units sold (a 3-year low), with a decline of 2.1% in dollar volumes. But businesses and consumers needed to quickly replace their cars and light trucks damaged by the hurricanes, which sparked a 15.2% m/m unit sales surge in September to 18.47 million (a 31-year high and the largest increase since 2005), with a 3.6% increase in dollar sales (the biggest gain since March 2015).
     
  • Retail gasoline sales Hurricane Harvey’s extreme flooding in Houston shuttered 25-30% of the nation’s refining capacity, spiking unleaded gasoline prices 15% nationally from $2.33 in late August to $2.67 per gallon in early September. But prices soared by some 50-70 cents per gallon (20-30% increases) in some parts of the country for a short period of time. As a result, these higher prices caused dollar volumes at retail gasoline stations to surge 5.8% during September, the biggest monthly increase since February 2013.
     
  • Building materials Store sales in dollar volumes of building materials to prepare for the arrival of the hurricanes and then to begin the rebuilding process rose 2.1% m/m in September. Unlike autos and gas, however, we expect the trend in strong building material sales will be sustainable into 2018.  

Consumer confidence remains strong:

  • Leading Economic Indicators (LEI) has been positive for 12 consecutive months, rising 0.4% m/m in August 2017 to a new 58-year cycle high of 128.8. We expect that next week’s September reading will rise by a tick again.
  • Michigan Consumer Sentiment Index surprisingly surged to a new preliminary 13-year high just this morning of 101.1 in October 2017, up from a 2-year low of 87.2 last October.
  • The National Federation of Independent Business (NFIB) small-business optimism index roared to a 12-year high of 105.9 in January 2017, up sharply from a cycle trough of 94.1 in September 2016, although it surprisingly slipped to 103.0 in September.
  • Conference Board’s Consumer Confidence Index soared to a 16-year high of 124.9 in March 2017, up from a 3-month low of 100.8 in October 2016, although it has since eased back to 119.8 in September 2017.

E-commerce sales rebound Amazon’s annual prime day on July 11 sent e-commerce sales soaring by an upwardly revised 2.0% m/m (originally 1.8%) in July, but August fell 0.4% (preliminarily reported as a much sharper 1.1% decline), as some sales were probably pulled forward. As we had expected, September’s e-commerce results bounced, rising 0.5%.


Electronics disappoint again In what is clearly the most disappointing aspect of this report for us, electronics sales were negative m/m for their fifth consecutive month through September. We had felt that consumers were patiently waiting for Apple’s iPhone 8 launch, which finally came last month, but this temporary chilling effect has not yet thawed. We remain convinced, however, as we look out through Christmas, Hanukkah and the Chinese New Year in the coming months, that electronic sales will turn positive.

Claims data peaks While August and September nonfarm payrolls were disappointing, we continue to believe the underlying strength of the labor market remains solidly in place. To that point, initial weekly unemployment claims for the August survey week of Aug. 12 numbered only 232,000, just off a 44-year cycle low. Jobless claims then spiked to 298,000 for the week ended Sept. 2 due to the effect of the hurricanes. But yesterday, we learned that claims have since eased back down to only 243,000 for the week that ended Oct. 7. It appears clear to us that with the normalization of the claims data, the broader labor market will begin to rebound during the fourth quarter, which should boost holiday spending.

Best BTS in three years With strong results in July and September and August’s upward revision, we now know that average retail sales for the third quarter of $479.0 billion was a solid 3.9% y/y increase over the same 3-month period in 2016 and the best BTS season in three years. That compares with y/y gains of 2.6% in each of 2016 and 2015, but a stronger 4.8% BTS gain in 2014.

Similar story for Christmas? Christmas retail sales are typically 80-90% positively correlated with BTS results, barring extreme weather issues, which we’re obviously dealing with in 2017 because of a very active hurricane season. As if on cue, the National Retail Federation last week issued its U.S. holiday forecast that total sales would rise an estimated 3.6% to 4% y/y, with e-commerce rising an estimated 11-15%. Because consumer spending accounts for 70% of GDP, holiday sales are an important driver of fourth-quarter economic growth.

The national retailers and shipping companies are setting their holiday hiring plans accordingly. Amazon.com plans to add 120,000 seasonal warehouse workers, and United Parcel Service plans to hire 95,000 workers. Walmart plans to give its existing employees more hours, but also add 5,000 seasonal workers to its e-commerce business. Target plans to increase its hiring 40% this year, adding 100,000 seasonal workers (compared with 70,000 last year), with another 4,500 seasonal workers for its distribution and fulfillment centers (versus 7,500 last year). Macy’s plans to hire 18,000 holiday workers for its warehouses this year, a 20% increase. But total holiday hiring will slip to 80,000 from 83,000 last year, although Macy’s did close 70 unprofitable stores over the past year.

Strong September post-hurricane bounce We popped the hood on this morning’s solid retail-sales report. Here are the pertinent details:

Best nominal sales gain in September since March 2015 Headline retail sales for September rose 1.6% m/m, compared with consensus expectations for a slightly stronger 1.7% increase. August was revised up a tick to a 0.1% m/m decline, and July was revised up from a m/m gain of 0.3% to a final gain of 0.5%. In addition to what has previously been discussed, food stores and eating and drinking establishments each rose 0.8% m/m in September, apparel rose 0.4%, and general merchandise gained 0.3%, which helped to boost BTS spending.

Ex-auto sales strong September’s core retail sales, which strip out volatile auto results, soared 1% m/m, a tick better than consensus estimates. August’s core retail sales were revised up sharply from a preliminary m/m gain of 0.2% to a stronger increase of 0.5%, while July’s retail sales ex-autos were revised up a tick to a final increase of 0.5%. According to the Commerce Department, auto sales surged 15.2% m/m in September to 18.47 million annualized units (a 31-year high and the largest increase since 2005), with a 3.6% increase in dollar sales (the biggest gain since March 2015).

Ex-autos & gas solid During Hurricane Harvey in Houston, whose extreme flooding temporarily shuttered an estimated 25-30% of the nation’s refining capacity, unleaded gasoline prices rose 15% nationally from $2.33 to $2.67 per gallon, although prices did spike by 50-70 cents per gallon (20-30%) in some parts of the country. These higher prices caused dollar volumes at gasoline stations to soar 5.8% m/m during September. So adjusted core retail sales, which strip out both auto and gasoline sales, rose 0.5% in September, a tick better than expected. August results were revised up by 2 ticks to a modest increase of 0.1%, and July results were revised up a tick to a final gain of 0.6%.

‘Control group’ solid, boosts GDP Finally, so-called “control” results—which strip out autos, gasoline, building materials and food service, and feed directly into the Commerce Department’s quarterly GDP calculation—rose a solid 0.4% m/m in September, exactly in line with consensus expectations. August’s results were revised up by 2 ticks to break even, and July’s results were revised up a tick to a strong final gain of 0.7%. So, despite the negative economic impact from the hurricanes during the third quarter, solid control readings due to favorable trends in consumer spending should help to ameliorate the storm-induced impact on third-quarter GDP. We cut our estimate in early September to 2.4% to account for the storms, but we are forecasting 2.9% in the fourth quarter, as the rebuilding effort begins.

Mazel tov, Grace!

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