Orlando's Outlook: Will they cancel Christmas this year?
Bottom line Retail sales were much weaker than expected in October—largely due to Hurricane Sandy on the East Coast—while September results were revised higher, capping a very solid Back-to-School (BTS) season in the third quarter. To be sure, in the aftermath of the nation’s second-worst natural disaster after Katrina, consumer spending is experiencing at least a temporary mix shift in which consumers delay discretionary purchases and focus on buying just the basics for their homes and families to help return their lives to normalcy. In addition, as we shift our focus to November, the recent status-quo election results raise legitimate questions about whether President Obama and Congress will be able to successfully navigate the fiscal-cliff and debt-ceiling discussions by year-end in a pro-growth fashion, and thus avoid plunging the U.S. economy into a voluntary recession. Ordinarily, we’d remind investors that all-important Christmas sales are historically 80%-to-90% correlated with the strength or weakness of BTS, but we can throw those relationships out the window this year, given the extraordinary economic impact of both Sandy and Washington. Because consumer spending accounts for 70% of GDP —and because we already know that the U.S. economy will take a temporary hit from Sandy for the next few quarters—that clearly leaves us on high alert. How disappointing will Christmas be because of Sandy and Washington, and will that be enough to push the U.S. economy off that slow-growth knife’s edge and into recession?
October retail sales were surprisingly poor Nominal retail sales for the month fell 0.3%, a tick below forecasts, compared with September, which was revised up two ticks to a very strong increase of 1.3%. August’s gain was revised down from 1.2% to a final increase of 1.0%, while July enjoyed a final nominal gain of 0.7%. With flat results, October’s core retail sales, which strip out volatile auto results, also were two ticks worse than expected, while September was revised up a tick to a strong gain of 1.2%. Month-over-month total vehicle sales fell 4.4% in October to a 14.22 million annual run rate due to Sandy, but we expect them to recover in coming months. August was revised down two ticks to a gain of 0.8%, while July had a final increase of 0.9%. Adjusted core retail sales, which strip out results from both gasoline and auto sales, were very disappointing in October, falling 0.3% compared with consensus estimates for an increase of 0.4%; September, on the other hand, was revised up a tick to a strong gain of 1.0%. August posted a tepid 0.3% gain, and July had a strong 0.9% final increase. Finally, retail “control” sales, which back out autos, gas and building materials and are a direct input into quarterly GDP, declined 0.1% in October, significantly worse than the 0.4% gain that had been forecast. That compared with an unrevised 0.9% increase in September, a two-tick downward revision in August to a decline of 0.1%, and a solid 0.9% increase in July.
Washington’s a ghost town during Thanksgiving week In the immediate aftermath of the presidential election on Nov. 6, the major U.S. equity-market indices plunged by 6% to 7% to their intraday lows last Friday morning. Why are investors so concerned? Because having lived through the second half of 2011—during which the “Grand Bargain” between President Obama and House Speak John Boehner blew up, the debt-ceiling discussion was a disaster, the three credit-rating agencies downgraded U.S. government debt, and the inept Congressional Super Committee was a colossal failure—we insanely elected the exact same people to return to Washington to have the exact same discussion, and this time we’re expecting positive results.
So in the week after the election, President Obama met with union leaders on Tuesday, with a dozen corporate CEOs on Wednesday, and with the Congressional leadership on Friday, which included Speaker Boehner, Senate Majority leader Harry Reid, Senate minority leader Mitch McConnell, and House Democratic leader Nancy Pelosi. The positive vibes expressed by all after those meetings sparked the equity markets to retrace roughly half of what had been lost over the last three trading days.
But rather than capitalize on this new-found positive momentum, Congress—after a punishing four-day workweek last week, no doubt—decided to take off the entire Thanksgiving week. Meanwhile, President Obama flew to Southeast Asia for visits with Thailand, Cambodia, and Myanmar. So no further progress will be made on the fiscal-cliff and debt-ceiling discussions until after Thanksgiving, at the earliest.
Christmas is a barbell season, with a political twist this year The Black Friday/Cyber Monday post-Thanksgiving holiday weekend is critically important for retailers because, after a blazing start to the season, sales typically slip into a three-week lull before the final 10-day sprint into Christmas. For that reason, several major national retailers, including Wal-Mart, Target and Sears, plan to open their stores on Thanksgiving night to lure in shoppers, and they’ve already been offering their blockbuster deals on line.
The political risk for consumer spending is obvious. With no Washington deal currently in place for the fiscal cliff and the debt ceiling, we have no visibility on the immediate prospects for either a recession on the one hand, or a resumption of trend-line economic growth of 3% or more on the other hand. So how do consumers respond this coming holiday weekend? Do they shop as if everything will work out just fine down in Washington, or are they haunted by the memory of 2011 and the immediate prospect for recession, in which case they pull in their horns and moderate their spending plans? And if Thanksgiving weekend is lost, can those sales be made up later in the season, if President Obama and Congress subsequently reach an acceptable pro-growth deal?
Consumer confidence rising The Conference Board’s consumer confidence gauge rose to 72.2 in October, its highest level since February 2008. But the University of Michigan’s final consumer sentiment index for November is now sitting at 82.7, still a five-year high but down slightly from November’s preliminary reading at 84.9. This suggests that concerns about the election results may be seeping into everyone’s collective consciousness. In addition, the National Association of Home Builders (NAHB) housing market index—a measure of industry confidence—spiked to six-year high of 46 in November, confirming our view that the housing market hit bottom last year. The personal savings rate fell in September to 3.3% from 3.7% in August, which is the lowest level since last November, so consumers will clearly need increased confidence to fuel stronger consumption trends during Christmas.
Businesses already voting with their feet In the flash report for third-quarter GDP, real business fixed investment actually declined 1.3%, compared with a gains of 3.6% in the second quarter, 7.5% in the first quarter, 9.5% in last year’s fourth quarter, and 19.0% in the year-ago third quarter, so the trend has clearly been accelerating to the downside.
Business equipment and software spending was flat in the third quarter, which represents the weakest reading in three years, after gains of 4.8% in the second quarter, 5.4% in the first quarter, 8.8% in last year’s fourth quarter and 18.3% in the year-ago third quarter. Business structure investment such as factories and office buildings fell by 4.4% in the third quarter on the heels of increases of 0.6% in the second quarter, 12.9% in the first quarter, 11.5% in last year’s fourth quarter and a booming 20.7% in the year-ago third quarter.
Due to the economic chilling effect from the impending fiscal cliff and potential debt-ceiling breach, a negative pattern clearly has been forming, with companies simply deciding not to hire or invest in their businesses until there is some clarity on how pro-growth and business-friendly Washington’s new fiscal policies will be come January 2013. Our fear is consumers may follow a similar path this Christmas.