Sunday, January 17, 2016

Weak US retail sales

The softer tone to US activity data towards the end of last week didn’t help alleviate concerns about global growth.  December readings for industrial production and retail sales were disappointing, although they came in a week that also saw solid readings for new jobs openings and hiring along with rises in both business and consumer confidence. Add that to last weekend’s solid payrolls result and the recent data is better described as “mixed”.

Industrial production came in weaker than expected.  Forecasts were already weak given expected declines in both utilities (warm winter weather) and mining (oil).  However manufacturing (three quarters of industrial production) was also softer than expected.

Manufacturing continues to face the challenging headwinds of modest global growth and the higher US dollar.  Lower motor vehicle production also added to the weakness as strong sales and production earlier in the year leveled off as the year came to a close.  

The bigger surprise and of more concern was the weakness in retail spending in December.  Nominal sales fell 0.1% in the month, in line with forecasts.  However sales in the control group (the portion of retail sales that feeds directly into GDP) came in at a weaker-than-expected -0.3% for the month. 

Some of the concern is moderated by the fact that some of the weakness here also appears weather-related with slow sales in clothing stores.  Sales remained strong in other areas such as furniture store off the back of strong construction activity.  Nevertheless the weakness in control group sales will likely lead to further downward revisions to already soft fourth quarter 2015 GDP forecasts to around 1.0% (annualised).

The latest retail spending data is a concern because our positive US economy outlook for 2016 requires the consumer to take the lead role.  Rising aggregate labour income on the back of solid jobs growth, rising average working week and continued, albeit modest, wage gains should support continued solid growth in consumer spending.  We also think we haven’t yet seen much of the benefit of the gain to consumers wallets of lower oil prices flow through to spending yet.  Our forecast also has the services sector taking the major supporting role in the economy this year while the productive sectors and business investment remain soft.  

Right now we believe that story is still intact, especially given the continuing improvement in the key labour market indicators, but we are not blind to risks around our forecast. 

We think global growth concerns are overdone right now.  How the FOMC is thinking about things will become evident following their meeting at the end of January.  The Committee expects to raise interest rates four times this year.  We’ve been expecting three hikes based on the assumption the Committee may want to pause at some point in the year simply to reinforce the point that interest rates are not on a pre-determined path higher.   If markets remain volatile and the data mixed, a pause may come sooner rather than later.