RETAILING

U.S. Retail Spending Picked Up Strongly in September American shoppers boosted their spending on vehicles, clothing and many other goods, a bright spot amid signs the economic recovery remains fragile.

• Retail sales rose a seasonally adjusted 1.9% in September from the prior month, the Commerce Department said Friday.
• Sales at motor-vehicle dealerships, which make up about 20% of total retail sales, rose by a robust 3.6% in September.
• Excluding automobiles, gasoline, building materials and food services, sales increased 1.4% last month after a downwardly revised 0.3% drop in August. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. They were previously estimated to have dipped 0.1% in August.

Covid-19, rescue checks, re-openings, school schedules are all factors that make the normal seasonal adjustment factors unreliable in 2020. So, seasonally adjusted MoM retail stats are not very useful this year. It is preferable to look at the YoY change of unadjusted sales combining periods to more accurately assess trends:

• Total Retail Sales were up 7.1% YoY in September but Aug-Sep combined were up 3.5%, in line with Jun-Jul’s 3.7%. Q3 and Q4 of 2019 were up 3.9% and 4.0% respectively and Jan-Feb sales were up 6.6%. In reality, unadjusted retail sales are growing at a slower pace than pre-pandemic.

• Importantly, the pandemic/lockdowns/restrictions have forced an involuntary redistribution of expenditures. Restaurant sales are down 15.6% in Aug-Sep but Supermarket sales are up 9.6%. For the same reasons, plus the decline in gas prices, spending at Gas Stations are down 13.3% in the last 2 months. In total, spending on food (net stores-restaurants) and gas is down 6.0% in Aug-Sep, freeing over $10B to spend elsewhere.
• Retail sales ex-Food & Gas was up 8.2% YoY in Aug-Sep, after +9.4% in Jun-Jul and +6.6% in Jan-Feb.
• The big winners were Building Material Stores where pre-pandemic growth quadrupled and Nonstore retailers which experienced a tripling in growth. The charts above and below are all YoY growth of non-seasonally adjusted sales.

   

• Sales of all other retailers (total ex-Food, Gas, Building Mat and Nonstore) were up 3.1% in Aug-Sep, in line with Jun-Jul but down from 6.3% in Jan-Feb.

Please note that these are all rough estimates since it is impossible to neatly breakdown categories by retail format (e.g. food is sold in many other venues than supermarkets).

The overall conclusion from this exercise is that, in total, retail sales are not booming contrary to media reports. The rescue checks helped maintain spending growth about in line with pre-pandemic trends with some retail types winning big at the expense of others.

Forced savings on food and gas are continuing (although at a much reduced rate for food in recent months, probably less hoarding) but rescue money has stopped. As Trump often says, we’ll see what happens…If Congress, possibly misled by the strong seasonally adjusted numbers, does not move, Americans will need to use more of their savings in order to keep spending. But will they?

• Pandemic Aid Swelled Savings of the Unemployed, Study Shows. Now They Are Running Low. Loss of extra jobless benefits may point to tightened household spending in months ahead

In a study released Friday, economists at the University of Chicago and JPMorgan Chase Institute looked at how economic-relief measures enacted this year, including an extra $600 a week in jobless benefits and one-time $1,200 payments to most households, affected the savings and spending of unemployed workers.

They found that workers who had received benefits pulled back spending moderately in August, after the extra $600 benefit payments expired July 31. In the first month without the extra payments, they also spent about two-thirds of the savings accumulated during the previous four months. (…)

The findings may help explain why overall household spending in August was stronger than economists expected, despite a drop in incomes after unemployment checks shrank. They also point to a vulnerability for the U.S. economy in the months ahead: With savings dwindling and no further economic relief in sight, nearly 11 million jobless workers may curb spending even further or fall behind on debt or rent payments.

“It very much seems from the data that this is kind of a fall in progress,” Fiona Greig, director of consumer research at the JPMorgan Chase Institute, said of the spending decline. (…)

Families of recipients increased their spending by 22% in April from a year earlier, to more than they were spending before the pandemic, according to the researchers, who attributed the increase largely to the $600 payments. That suggests the benefits weren’t only preventing hardship for millions of families but also providing a boost to the economy overall, Ms. Greig said.

When the $600 payments expired, those families cut spending by 14% in August, back to the average level in January and February.

At the same time, they began to draw down the money they had socked away earlier in the year. (…)

Ms. Greig said the decline in household spending continues, though researchers don’t yet have complete data for September.

“Eventually, if they continue even at the August level, they will continue to draw down that savings buffer,” Ms. Greig said.

As her co-author, University of Chicago economist Peter Ganong, put it, “The economy right now is essentially running—or not running—on the exhaust fumes of the CARES Act.”

• JPMorgan Chase & Co.’s tracker of credit- and debit-card transactions showed spending was down 5.7% compared with a year ago through the week ended Oct. 12. (Total personal expenditures were down 1.9% YoY in August, the last data point).

The survey from the University of Michigan on Friday showed consumer sentiment edging up in early October.They were less enthusiastic about buying household appliances. The share who believed it was a good time to buy a car was the lowest in nine years.

The U of M sentiment index is nearly 20% lower than in late 2019 and is at its 2014 level when unemployment was in the 6% range. It is now 7.9%, with an uncontrolled virus, a divided Congress and a contested election.

From the NY Fed last week:

How Do Consumers Believe the Pandemic Will Affect the Economy and Their Households?

(…) We start with consumers’ beliefs regarding the expected number of weeks it will take for U.S. economic activity to get back to pre-COVID levels. When asked in June, the average expected number of weeks required for economic recovery was 94 weeks. This average increased to 132 weeks (more than 2 years) in August. Even though there are differences in the expectations of respondents, the increase since June in the expected duration of the economic recovery is similar across demographic groups.

Each SCE respondent was asked to consider three hypothetical scenarios for the possible evolution of the COVID pandemic in the United States over the next six months. Under the “baseline” scenario, the levels of new coronavirus cases, deaths, and restrictions on distancing in the United States (including where the respondent currently lives) all remain exactly the same as they currently are today. The coronavirus cases, deaths, and restrictions on distancing all gradually drop to zero over the next six months in the “good” scenario, whereas they double in the “bad” scenario.

For each scenario, we ask the respondents what they think would happen to their monthly household spending, income, their ability to make necessary payments, their employment prospects, and chances of applying for government assistance over the next six months.

As indicated in the table below, respondents expect their monthly spending to be $2,883 on average under the baseline scenario. They expect their spending to increase by 4.6 percent to $3,016 under the good scenario and to decrease by 5.9 percent to $2,714 under the bad scenario. Note that, if taken at face value, the 5.9 percent decrease in spending in the bad scenario (in which COVID cases doubled) can be interpreted as a -6 basis point “COVID elasticity of spending.” That is an increase of 1 percent in COVID-19 cases and deaths results in a 0.06 percentage decrease in household spending. In both scenarios, the dollar and percentage change in spending is larger for high income respondents and for those with a college degree.

As indicated in the table below, respondents on average expect their monthly household income to be $6,811 under the baseline scenario. Respondents only expect a modest increase in their household income of 1.2 percent to $6,896 under the good scenario, and a decrease of 8.1 percent to $6,262 under the bad scenario. In both scenarios, the dollar and percentage change in income is again larger for higher income respondents.

With these scenarios, it seems to me that most rational persons would seek to build precautionary savings.

Holiday Delivery Crunch Starts Early This Year Both FedEx and UPS have told some of their largest shippers that most of their capacity is already spoken for. The outlook has sent retailers on the hunt for alternatives.

U.S. Industrial Production Takes Breather in September

Industrial production fell 0.6% in September (-7.3% year-on-year) after four consecutive monthly gains and an unrevised 0.4% increase in August. The Action Economics Survey forecast a 0.7% growth in September. This leaves industrial production 7.1% below February and at 2016 levels (output peaked in December 2018).

Manufacturing production declined 0.3% in September (-6.0% y/y) with August revised up to 1.2% from 1.0%. This leaves factory output 6.4% below February and at 2011 levels. Utilities dropped 5.6% (-6.1% y/y) while mining rose 1.7% (-14.8% y/y).

Manufacturing of durable goods fell 0.5% in September (-7.1% y/y) led by a 4.0% drop in motor vehicles (+0.4% y/y). This is the second consecutive monthly decline of this magnitude for the auto sector. After rebounding from being down 84 percentage points (ppt) in April to +2.8 ppt in July, vehicle output is now 5.5% below the February level. The aerospace industry continues to show healthy gains, up 4.6% in in September, though it is still down 5.4% from February. Nondurable output was unchanged (-4.2% y/y) and remains 4.8% from pre-COVID levels; July 2018 was the peak for nondurable production.

Output of business equipment, an indicator of capital spending, declined 1.2% in September (-11.1% y/y) after four monthly increases, leaving it 8.8% below February levels.

Capacity utilization declined to 71.5% in September, well below the 76.9% in February and 79.6% cyclical peak in November 2018. The Action Economics Survey expected 71.9% in September. Factory sector use decreased to 70.5% versus 75.2% in February and the cyclical peak of 77.3% in December 2018.

Outside of the auto sector manufacturing output was flat.

Some people are surprised by the continued weakness in IP given the very encouraging recent PMI surveys. They are now learning that a diffusion index only provides the percentage of respondents saying their biz is up or down vs the previous month. Nothing about magnitudes, nothing about yearly trends. ING has the chart:

Manufacturing output underperforms the surveys

Mortgage rates at all-time lows are helping to push up home ownership rates for young people

@VrntPerception

China GDP Grows as Rest of World Fights Covid-19 The third-quarter results put China’s economy back toward its pre-coronavirus trajectory half a year after the pandemic gutted it. By contrast, the American economy is expected to shrink by 4.3%, the IMF said in its latest update this month

Chinese officials said Monday that gross domestic product expanded by 4.9% in the third quarter from a year earlier, putting China’s economy back toward its pre-coronavirus trajectory half a year after the pandemic gutted its economy.

The 4.9% growth figure for the third quarter fell short of expectations but brings China’s trajectory closer in line with forecasts made at the beginning of the year for 2020 growth of between 5.5% and 6%—forecasts made before the pandemic swept across the globe, killing more than a million people and crushing the global economy.

The third-quarter expansion builds on the second quarter’s 3.2% growth, which follows a historic contraction of 6.8% in the first three months of the year, when authorities locked down the central Chinese city of Wuhan in a bid to curb the fast-spreading virus.

The International Monetary Fund is projecting China’s economy to expand by 1.9% in 2020, putting it on track to be the only major world economy to grow this pandemic-hit year.

By contrast, the American economy is expected to shrink by 4.3%, while the eurozone is forecast to contract by 8.3%, the IMF said in its latest update this month.

Monday’s third-quarter growth number offers further evidence of China’s relative strength and moves the country’s economy into positive territory for the first nine months of the year, expanding 0.7% from a year earlier. (…)

In August, Chinese retail sales showed an increase from a year earlier for the first time in 2020. And on Monday, China said retail sales grew 3.3% in September, outpacing economists’ expectations for 1.7% growth.

Chinese citizens’ disposable income also turned to growth in the third quarter for the first time this year, officials said Monday, rising 0.6% from a year earlier. (…)

Even so, consumer spending remains subdued, according to some metrics.

During an eight-day-long National Day holiday that began on Oct. 1, 637 million people traveled within the country, spending some $69 billion, according to official figures—roughly 70% of spending during last year’s shorter seven-day-long holiday. (…)

That has raised concerns about the robustness of the consumer recovery, after hopes that a combination of pent-up demand, an extra holiday day and closed borders forcing travelers to redirect any overseas spending at home would result in a stronger rebound.

“The rebound is lower than expected considering the sharp drop in overseas travel,” Betty Wang, a senior China economist at investment bank ANZ, told clients. “It is too early to be complacent.” (…)

(Bloomberg)

VIRUS UPDATE

(New York Times)

Excess Deaths and the Great Pandemic of 2020

Two new reports in JAMA provide updated estimates regarding the mortality associated with the coronavirus disease 2019 (COVID-19) pandemic in the US. In a research letter by Woolf and colleagues, the authors update their analysis of the number of “excess” deaths in the US related to COVID-19 and other causes from March 1 through August 1, 2020.^1,2 The authors report that during this 5-month period, a total of 1 336 561 deaths occurred in the US, an estimated 20% increase compared with the number of expected deaths, and representing 225 530 excess deaths.² Approximately 67% of these excess deaths were attributable directly to COVID-19, whereas excess deaths attributed to other causes also could have been related to the pandemic in general.

A second research letter, by Bilinski and Emanuel,³ compared the US to Organisation for Economic Co-operation and Development countries with populations exceeding 5 million. The authors found that since the beginning of the pandemic, among the countries with moderate mortality (n = 8; COVID-19 deaths, 5-25/100 000) or high mortality (n = 7; COVID-19 deaths, >25/100 00), the US ranked third, with 71.6 deaths/100 000.

The importance of the estimate by Woolf et al—which suggests that for the entirety of 2020, more than 400 000 excess deaths will occur—cannot be overstated, because it accounts for what could be declines in some causes of death, like motor vehicle crashes, but increases in others, like myocardial infarction. These deaths reflect a true measure of the human cost of the Great Pandemic of 2020. As depicted in the illustration, these deaths far exceed the number of US deaths from some armed conflicts, such as the Korean War and the Vietnam War, and deaths from the 2009 H1N1 (Swine flu) pandemic, and approach the number of deaths from World War II. (…)

Follow up from Blind Lou:

Fed officials call for tougher rules to prevent asset bubbles Officials worry that low interest-rate policies could encourage excessive risk-taking

The FT quotes some Fed officials discussing how the Fed can tame bubbles coming out of its low rates forever policy .

• “If you want to follow a monetary policy . . . that applies low interest rates for a long time, you want robust financial supervisory authority in order to be able to restrict the amount of excessive risk-taking occurring at the same time,” he said. “[Otherwise] you’re much more likely to get into a situation where the interest rates can be low for long but be counterproductive.”
• “I don’t know what the best policy solution is, but I know we can’t just keep doing what we’ve been doing,” he said. “As soon as there’s a risk that hits, everybody flees and the Federal Reserve has to step in and bail out that market, and that’s crazy. And we need to take a hard look at that.”
• Mr Kashkari, who has called for higher capital requirements at large banks, said the financial system needed to be “fundamentally more resilient, both [in] the banking sector and the non-banking sector” during a period of turbulence like the current one.

EARNINGS WATCH

We now have 49 reports in, and 86% beat rate and a +22.6% surprise factor.

Q3 earnings are seen down 18.7% from -21.4% on Sep. 1. Q4: -12.5% vs -13.6%.

Trailing EPS are $137.11. Full year estimates: 2020: $131.13, 2021: $165.83.

Among S&P 500 companies that have disclosed results, 86% beat analyst estimates, on pace for the best showing since Bloomberg began tracking the data in 1993. That’s doing little to excite the bulls: shares of reporting companies are actually down about 2% the next day. The result was a relatively flat week in which the S&P 500 stalled about 75 points away from a record. (Bloomberg)

Wall Street bank trading boom does little to assuage concerns about lending

As Wall Street banks reported quarterly results this week, investors wondered about the staying power of the trading bonanza that has floated profits, offsetting problems in traditional lending businesses that have been hurt by the pandemic.

Corporate Tax Increase Looks More Likely as Election Nears The tax law that lowered the U.S. corporate tax rate when Republicans held power in 2017 could vanish next month, upending the planning companies had done around the 21% rate.

(…) Democrats, with a chance to control the House, Senate and White House for the first time in a decade, want to raise the rate to 28%. President Trump says he would lower it to 20% in a second term.

The tax-rate increase, plus other policies proposed by Democratic presidential candidate Joe Biden, would lower profits and raise costs of operating abroad. The Biden proposal, when combined with state taxes, would push the U.S. back toward the high end of industrialized countries’ corporate rates, after a few years in the middle of the pack. (…)

Companies have incorporated the 21% rate into their planning and would have to adjust as Democratic plans move through Congress. Some investments that made sense at a 21% rate wouldn’t yield after-tax profits at higher rates or with steeper taxes on foreign income. (…)

To partially offset the cost of the rate cut, Republicans limited deductions for business interest, curbed breaks for life insurers and scheduled tighter rules for deducting research expenses to begin in 2022. Those changes to broaden the tax base become more salient if the rate rises, and a 28% rate could leave some companies worse off than they were under the 35% rate. (…)

TECHNICALS WATCH

My favorite technical analysis group is seeing strength across all parts of the market.

Four Scandal-Ridden Firms, One Auditor: Ernst & Young The Big Four accounting concern reviewed the books of Wirecard, Luckin Coffee and other companies where investors lost billions when scandals emerged. The firm, which caters to fast-growing tech startups, says it unearthed some of the problems.

This year, $2 billion is missing at a German fintech company, $300 million of sales has been found to be fabricated at a Chinese coffee chain and $5 billion in undisclosed debt has been uncovered at two related companies listed in the U.K. Together, the incidents cost shareholders of the companies roughly $30 billion.

All had been audited by Ernst & Young. Last year, EY also audited office-space company WeWork, which nearly collapsed after fumbling a planned initial public offering.

EY is one of the Big Four accounting firms, whose audits are meant to give investors confidence in companies’ figures. EY missed red flags or failed to aggressively pursue them at some of the companies ahead of their scandals, and for the most part it was outsiders who raised questions first, a review based on publicly available documents and interviews with people close to the events shows. Now, regulators are scrutinizing EY’s work. (…)

When I look at a new company, I always check who is the auditor, wary of the small, more marginal firms which can be more easily influenced by management. Obviously not fool proof!

In Saturday’s WSJ MarketWatch:

I’m 24 and dating a 64-year-old man. He wanted to get married, but I discovered he never got divorced. Have I been conned?

Yes, in the WSJ!