Trick or treat for consumers?
Bottom line The S&P 500 has rallied 6% since its Oct. 3 intraday trough, pushing back toward record highs today, despite decided weakness in manufacturing and concerns consumer spending will follow.
We continue to believe, however, that the combination of the strongest labor market in half a century, low interest rates and energy prices, resurgent consumer confidence, a solid wealth effect and an elevated savings rate means consumers remain healthy. They should have plenty of dry powder to spend during the holiday season. In fact, the National Retail Federation projects holiday purchases in November and December will rise 3.8% to 4.2% year-over-year (y/y), well above the disappointing 2.7% gain last Christmas.
To be sure, September’s ISM manufacturing index hit a 10-year low at 47.8, largely because of the trade war with China, the safety concerns impacting the manufacturing of Boeing’s 737 MAX jet and the United Auto Workers’ strike against General Motors. But the strike, now six weeks old, may end next week. Moreover, we remain confident that the progress U.S. and Chinese negotiators have made over the past fortnight may be signed into the first phase of a trade deal by Presidents Trump and Xi on Nov. 17 at the Asia Pacific Economic Cooperation (APEC) summit in Chile.
As a result, manufacturing metrics may be bottoming right here, and after an uncharacteristically sluggish September, consumers may very well be ready to go on a holiday spending spree, helping the S&P 500 reach our year-end target of 3,100.
Retail sales take a break In the wake of strong retail sales over the 6-month period from March through August, September nominal retail sales actually declined 0.3% month-over-month (m/m) in September, while August was revised up to a gain of 0.6% from 0.4% m/m and July was revised down a tick to a strong final gain of 0.7%. “Control” results (which exclude autos, gas, food-service and building materials and feed directly into the GDP report) were flat in September, while August was unchanged at a 0.3% m/m gain and July was revised down a tick to a solid final gain of 0.8%.
Despite the weak September, perhaps due to China-related worries, Back-to-School (BTS) spending collectively posted a solid y/y gain of 4% for July, August and September 2019. Last year’s BTS gain of 5.5% was the best in seven years.
Lower gasoline prices could help Gas prices have fallen about 10% nationally over the past six months, from $2.90 per gallon in April to $2.60. This could add 0.1-0.2% to GDP annually and help to fuel other discretionary spending.
Dry powder The personal savings rate rose back up to 8.1% in August from 7.8% in July (an 8-month low), down from a 7-year high of 8.8% in February 2019.
Labor market remains solid The September employment report was modestly disappointing on the surface, with a softer-than-expected increase of 136,000 nonfarm payroll jobs compared with consensus expectations of 145,000. But July and August were revised sharply higher by a combined 45,000 jobs, more than offsetting September’s nominal miss of 9,000 jobs.
In addition, the household survey added a healthy 391,000 workers in September, driving the official unemployment rate (U-3) down to a new half-century low of 3.5% and the labor impairment rate (U-6) down to a 19-year low of 6.9%. The participation rate held steady last month at a 6-year high of 63.2%.
The survey week for initial weekly unemployment claims was a relatively healthy 218,000 for the week ended Oct. 12—marginally higher than the 49-year cycle low of 193,000 in April 2019. But the GM strike impacting 46,000 employees started on Sept. 15 and will begin to impair employment results in October.
Consumer confidence rebounding as China trade concerns fade:
- University of Michigan’s Consumer Sentiment index fell from a 13-year high of 101.4 in March 2018 to 89.8 in August. But over the past two months, it has recovered sharply to 95.5 this month.
- Conference Board’s Consumer Confidence index declined from an 18-year cycle high of 137.9 in October 2018 to 125.1 last month. But this month’s reading, to be released next week, is expected to bounce back to 127.7.
Interest rates heading lower Federal Reserve Chair Jerome Powell has seemingly set the table for a third consecutive quarter-point interest rate cut at the Fed’s next policy setting meeting on Oct. 30. His midcourse correction will have reduced the upper band of the fed funds rate to 1.75%, a point at which we believe the Fed will then stand pat. But lower interest rates—and potentially another round of home mortgage refinancing—could help spark stronger consumer spending during Christmas.