There were several important reports on the U.S. economy released this morning. First, data from the Census Bureau showed that advance estimates of retail and food services sales for August totaled $456.3 billion, down 0.3 percent from July. This was the first month-over-month decline since March and much worse than economists had expected. Over the past year, headline retail sales have risen by just 1.9 percent, one of the slowest rates of annual growth seen during the recovery, although relatively cheaper energy prices remain a big factor behind this. Core retail sales, which exclude the volatile autos and gasoline components, fell by 0.1 percent in August, the second monthly decline in a row. Apart from food-related sales, retail spending was weak across the board last month, even at non-store retailers like Amazon which experienced their first monthly decline since January 2015. Overall this was a disappointing report which will create doubts that American consumers are providing an adequate boost to economic growth. Downward revisions to third quarter gross domestic product (GDP) should therefore be expected and this weak data will also make it easier for officials at the Federal Reserve to hold steady on interest rates at next week’s monetary policy meeting.
Next, data from the Federal Reserve Bank of New York showed that manufacturing activity in the Northeast region of the country improved this month, albeit only slightly. Specifically, the general business conditions index rose from -4.21 to -1.99 in September, a smaller rebound than anticipated and the second negative (contractionary) reading in a row. The modest gain was due largely to improvements in the forward-looking components of the headline index because current measures of new orders, shipments, inventories, total employment, and the average employee workweek all deteriorated markedly this month. Much more encouraging was a report from the Federal Reserve Bank of Philadelphia, also released this morning, which showed that manufacturing activity in the Mid-Atlantic region of the country surged in September, as the general business conditions index jumped from +2.0 to +12.8. This was significantly better than economists’ expectations and the highest reading since February 2015. Measures of new orders and total employment improved this month but shipments, inventories, and the average employee workweek deteriorated. Outlooks for general business conditions six months from now softened and capital expenditure plans decreased. Managers in the September survey were also asked a series of special questions about their company's spending plans related to achieving future growth, and most respondents cited modernization of manufacturing processes (64 percent) and expansion of facilities (30 percent). Overall, though, incoming regional data on manufacturing activity for the month of September remain mixed, suggesting that there is still no clear end in sight for the “industrial recession” that started roughly a year ago.
Elsewhere, a report from the Federal Reserve Board of Governors showed that overall industrial activity in America softened in August, with total production falling by 0.4 percent. This was a larger decline than expected and the first monthly decrease since May. Apart from a solid gain in mining, industrial weakness was seen across the board in August, including a notable pullback in utilities as temperatures returned to normal levels (reduced A/C usage). Industrial production on a year-over-year basis fell 1.1 percent last month, the 12th month in a row of annual declines and a pattern rarely seen outside of a recession. Elsewhere in the report, manufacturing, which makes up roughly 75 percent of all industrial production, also fell by 0.4 percent last month, and capacity utilization, sometimes used as a leading indicator of inflation and potential output, slid to 75.5 percent, well below the long-term (1972–2015) average. Historically, the Federal Reserve generally does not like to raise rates when capacity utilization is under 80 percent and declining.
Sources: Econoday, Twitter, Bloomberg, ZH, U.S. Census Bureau, FRBP, FRBNY, FRBG, FRBSLPost author: Charles Couch