Today: Cracks in the U.S. growth story: flattening car sales, declining construction, retail sales, housing. Chinese risks. Oil deflation. Earnings.
I think this was one of the most important economic data released yesterday and CalculatedRisk is the only one to highlight it (other than Bearnobull). Nothing in the WSJ, nothing in the FT, nothing in Bloomberg’s top economic news…
Based on an WardsAuto estimate, light vehicle sales were at a 16.35 million SAAR in October. That is up 7% from October 2013, and unchanged from the 16.34 million annual sales rate last month.
Car sales have flattened since the spring in spite of a much improved economy and pretty upbeat consumer data (employment, wages, confidence, interest rates, credit availability, inflation, oil…) and higher manufacturer discounts. My thinking that we might well have seen the cyclical peak in car sales is getting stronger. Read on:
Truck sales are one of the less traditional indicators we like to follow to gauge overall strength in the US economy, and more specifically the small business sector. With that premise, this morning’s monthly sales figures from Ford weren’t exactly positive. In the month of October, Ford sold 63.4K F-Series trucks which was a fractional decline over the total from last October. This represents the third straight month where the monthly total was below the total for that month in the prior year. While this is a negative at the surface, as we have been pointing out over the last few months, some of the slowdown is due to the changeover of plants for the introduction of the new F-150. As the plants and production of the new F-150 come online, these results should improve.
For the first ten months of the year, Ford’s sales of F-Series trucks in 2014 now total 620K, which is also down slightly compared to last year’s total of 623K. Again, while the declines are somewhat expected, it does mark the first year/year decline since 2009.
Consider that consumer expenditures have been weak all summer through September’s important Back-to-School season. Weekly chain store sales peaked in July and have been sliding ever since. Trailing 4-week sales are now only 2.6% above last year’s, heading into the most important part of the year.
The value of construction put-in-place edged 0.4% lower (+2.9% y/y) during September following a 0.5% August decline. The 0.3% July rise was revised sharply lower. Since May’s peak, the value of construction spending has fallen 2.3%, pulling y/y growth to 2.9% versus its high of 9.8% in January.
U.S. construction activity seems to have turned broadly negative lately:
First-time home buyers made up the smallest share of U.S. buyers in nearly three decades, a traditionally solid slice of the housing market whose absence is raising questions about the impact of the crash on potential homeowners.
The finding, in a report by the National Association of Realtors, said about 33% of home buyers were first-time purchasers during the 12-month period that ended in June. That is down from 38% in the year-earlier period and off from the 40% that the group said is the historical norm. (…)
“Rising rents and repaying student-loan debt makes saving for a down payment more difficult, especially for young adults who’ve experienced limited job prospects and flat wage growth since entering the workforce,” said NAR chief economist Lawrence Yun.
Beyond the issues of affordability, some renters might be putting off home purchases because of the damage they saw housing do to the last generation of buyers, said Doug Duncan, chief economist of mortgage-finance company Fannie Mae.
Mr. Duncan said that when looking at reasons for not buying, renters typically don’t put tight mortgage credit as one of the primary concerns. “Today, demand weakness trumps credit tightness,” he said. (…)
Builders have been slow to commit to the first-time buyer segment. Before the housing bust, first-time buyers made up about 40% of the business of Home South Communities LLC, a builder in Suwanee, Ga., said chief financial officer Stephen Palmer. Now, such buyers make up merely 5% of the builder’s business, which Mr. Palmer said is in part a result of little demand from younger buyers.
“Millennials saw their parents take a beating on a house. The initial inclination is, ‘I don’t want to get tied down by a house. I saw what happened to my parents,’ ” Mr. Palmer said. He said that the profit margins on entry-level homes are also too low to warrant building them in a slow sales environment. (…)
Zerohedge has a lot of good charts on that today:
Banks Wrestle With Lackluster Lending The latest Fed survey of senior loan officers shows banks eased some credit standards and pricing but aren’t seeing much of a rise in demand for loans. That means banks will find it difficult to grow revenue.
The overall lending picture painted by the Federal Reserve’s latest survey of senior loan officers is one of a credit standstill. As a result, lending is unlikely to boost bank revenue by much in the fourth quarter.
The majority of banks reported that demand for prime mortgages held steady during the three months ending in September compared with the prior three months, with around one-fifth saying demand was stronger and one-fifth saying it was weaker. Around one-quarter of large banks—those with $20 billion or more of domestic assets—said they eased lending standards on prime loans, implying these banks were struggling to hold on to origination volume and market share.
Elsewhere in the mortgage market, the situation is similar. Around one-quarter of the banks that make so-called jumbo loans reported weaker demand, with the vast majority saying demand was unchanged. While a few banks reported that they eased credit standards on jumbo mortgages, this looks like an area where not a lot has changed. Much the same can be said of subprime lending.
Business lending tells a similar story. Only 26.3% of the banks reported moderately stronger demand from firms with sales of $50 million or more, while 10% said demand was moderately weaker. And even fewer saw growth in demand for loans from smaller businesses. Competition to make business loans, however, is heating up. One-quarter of banks said they had eased loan pricing terms. That could mean that the boost from higher demand gets erased by stiff competition. (…)
C&I loans seem to be another story:
MORE EVIDENCE OF LIFE IN U.S. BANK LENDING
The Federal Reserve’s senior loan officer survey, released Monday, showed banks are easing lending standards, narrowing interest rate spreads, increasing credit lines, extending maturities and easing covenants on commercial and industrial, and commercial real estate loans. For instance, nearly 32 of 72 banks said they were reducing the interest rate spread they charged on commercial and industrial loans. Many said they had a more favorable economic outlook and most cited intense competition as a reason for easing lending standards.
It is showing up in lending. Commercial and industrial lending was up 12.1% in late October from a year earlier. Commercial real estate lending was up 7.0%.
The data underscores evidence pointing to a continued growth pickup in the U.S. economy while the rest of the world lags – and it flies in the face of the common bank complaint that regulators have cracked down so hard that they can’t or won’t make loans.
The full survey is here.
(…) A slump in property sales and prices that began at the start of this year has been blamed for much of the slowdown in headline growth.
But the correction has so far been fairly mild and has not yet seriously impacted investment and construction, the most important drivers of the Chinese economy.
The volume of floor space sold in the first nine months of the year was down 8.6 per cent from the same period a year earlier.
Meanwhile, the amount of floor space under construction increased by 8.1 per cent in the same period, while newly completed floor space was up 5.1 per cent from a year earlier by the end of September.
This fundamental mismatch in supply and demand is adding to an already huge overhang in the housing market.
In a recent report, Goldman Sachs economists estimate around one-fifth of urban housing in China is empty.
A range of auxiliary industries, such as steel, face similar fates.
Despite many years of extreme overcapacity and falling profits – the price of steel is now less than the price of cabbage in China – steel production in China was up 5.4 per cent in the first nine months of this year.
Bankruptcies are another area where the pain has not yet really begun.
Han Chuanhua, a bankruptcy lawyer at Zhongzi Law Office in Beijing, says the number of bankruptcies has increased in recent months but many companies that should be going bust are not.
In many cases this is because local governments simply order courts not to accept bankruptcy cases because they do not want job losses or loss of tax revenue recorded in their jurisdictions.
Many companies have resorted to borrowing at high rates to roll over old loans and keep their gates open for a few months longer. (…)
China’s small lenders seek cover Credit tightens for SMEs as growth slowdown reduces risk appetite
New loans from China’s 8,591 small-loan providers came to just Rmb89bn ($14.5bn) in the first nine months of 2014, virtually half the Rmb161bn level in the same period last year, according to central bank data. (…)
Small and medium-sized enterprises account for about 60 per cent of China’s gross domestic product and 75 per cent of new jobs but have long struggled to access credit through traditional banks, which favour large state-owned companies and require land or fixed assets as collateral.
Small-loan companies contribute only a tiny portion of overall lending in China, with loans outstanding totalling Rmb908bn by the end of September, compared with Rmb95tn in commercial bank loans.
But such businesses and their clients are among the most sensitive to changing economic conditions. Growth has slowed this year as small companies suffer from weaker demand for their products and lenders seek to protect themselves from credit risk.
“Small-loan companies don’t have a lot of confidence in their clients right now,” said Xu Xiaoping, dean of the Center for Small Enterprise Financing Studies at Shanghai University of Finance and Economics.
Bad loans are also rising. The non-performing loan ratio for some small-loan companies in eastern China is more than 5 per cent, according to an unnamed central bank official quoted this week by Economic Information, a newspaper run by the official Xinhua news agency. That would be far above the official bad-loan rate of 1.08 per cent for commercial banks.
“Demand for funds is always robust but on the supply side small-loan companies are getting more cautious. Compared to banks, the credit quality of their clients is poorer, so they will feel the impact of the slowing economy more heavily,” said a small-loan industry association executive in northern China. (…)
The small-loan slowdown is occurring despite falling interest rates. Average rates on loans provided by Zuoli Kechuang Micro-Finance, for example, fell to 16.1 per cent in the first half of this year. That is down from 18.9 per cent in 2012, according to company filings, but still roughly twice the rate charged by the big banks to corporate borrowers. (…)
(…) During the past few weeks, officials at the Bank of Japan, Federal Reserve and Bank of England all fractured over just what they should be doing when managing their economies.
That suggests the emerging divergence between international central banks that has been a theme for investors this year can also be seen inside the institutions. It marks a change from the largely all-in unanimity that marked the fight against the financial crisis and the recession in 2008. (…)
Saudi Oil-Price Cut Upends Market The move likely paves the way for further crude-price declines and adds to pressure on U.S. energy producers.
Oil prices tumbled to their lowest point in more than two years after Saudi Arabia unexpectedly cut prices for crude sold to the U.S., likely paving the way for further declines and adding to pressure on American energy producers.
The decision by the world’s largest oil exporter sent the Dow industrials into negative territory for the day amid concerns about the pace of global growth.
The move heightened worries over the resilience of the U.S. oil industry, which has expanded rapidly in recent years. But that growth, driven largely by new production technology used to extract oil from shale-rock formations, has never been tested by a prolonged slump in prices.
While lower crude prices generally help consumers by reducing the amount they pay for gasoline, analysts said falling energy prices will squeeze profit margins at many U.S. energy companies, particularly smaller firms or those with large debt loads.
Meanwhile, Saudi Arabia raised the prices for its oil in other locations, including Asia, where the country had cut its prices for four consecutive months.
Market watchers had expected the Saudis to either cut prices in every major region, suggesting an intention to compete for buyers, or to raise prices across the board. Asia has been an especially competitive market for exporters in recent months, so the focus on maintaining market share in the U.S. was surprising to traders, some of whom interpreted the action as taking aim at U.S. shale-oil production rather than being driven by supply and demand. (…)
Amplifying investor anxiety, falling oil prices stand to make it more difficult for policy makers in the U.S., Japan and Europe to raise sluggish inflation levels. (…)
Imports of Saudi crude into the U.S. have fallen this year. According to the U.S. Energy Information Administration, they comprised 4.6% of total U.S. petroleum consumption in August this year, compared with 7% in the same month of 2013.
State-owned Saudi Arabia Oil Co. took the same strategy in 2011, raising Asian prices and cutting them in the U.S., said an industry official familiar with the move. At the time, the kingdom was taking advantage of the absence of Libyan oil exports, which had pushed prices higher in Europe and Asia more than in the U.S. (…)
The Saudi record in balancing prices and market share has been patchy at best. (…)
Saudi Oil Minister Ali al-Naimi has stood on the sidelines and spent much of the past month on vacation.
In early October, a Saudi oil delegation privately told attendees at a New York conference that the kingdom wasn’t alarmed by the price slide and wouldn’t unilaterally cut its output, according to people familiar with the matter.
Meanwhile, Prince al-Waleed bin Talal, a member of the royal family, publicly criticized Mr. Naimi’s approach to falling prices, saying he shouldn’t let the country’s cash reserves be depleted.
EU Cuts Eurozone Growth Forecast The European Commission cut its growth forecasts for the eurozone and the European Union, citing the tensions in Ukraine and the Middle East along with a lack of investment.
The commission said it now expects gross domestic product in the 18-country eurozone to grow 0.8% this year, down from 1.2% growth it forecast this spring. In 2015, the eurozone economy will likely grow 1.1%, also less than the 1.7% growth seen in the spring. In 2016, growth in the currency union will rise to 1.7%, the commission said.
The picture looks only mildly better for the broader EU. The 28 EU countries are now expected to grow on average 1.3% this year, down from 1.6% growth seen in the spring. Next year, EU GDP is expected to rise 1.5%, also below the 2% previously forecast. In 2016, growth is seen reaching 2%.
EARNINGS WATCH
It’s Halftime for Earnings Season Earnings season has passed the halfway mark — a good time as any to take stock of the numbers that have landed so far.
Of the 303 S&P 500 companies that have reported so far, 76% have beat expectations, according to S&P Capital IQ analysts. That’s well above the historical average of 64%. The expected earnings growth rate for the S&P 500 stands at 7.1% within the 7% to 8% range analysts in S&P Capital IQ’s Global Markets Intelligence unit expected.
Revenue growth remains sluggish at 3.3%, below the second-quarter growth rate of 3.8%, according to S&P Capital IQ.
This was in today’s WSJ. A quick check with S&P Capital IQ’s web site provides data on 363 companies with 75.5% beating. Another rapid look at RBC Capital’s stuff provides the most up-to-date data on 370 companies representing 81% of the S&P 500 market cap.
So far, earnings are beating by 5.0% while revenues have surprised by 0.5%. Expectations are for revenue, earnings, and EPS growth of 4.1%, 7.9%, and 10.1%,
respectively. Revenue growth is forecast at 4.1%.
Now you have much more than a half-time report. 
U.S. Light Vehicle Sales unchanged at 16.35 million annual rate in October
