Stocks and the macroeconomy disconnect, again.
Once again, we are in the uncomfortable position of having to give a rational analysis of the macroeconomy in the face of a euphoric stock market. The stock market frequently disconnects with glee from the macroeconomic data. They just aren’t the same thing. The Dow gained 223 points, or +0.8% today on – wait for it – hopes over trade talks! Really? Don’t stock investors know that hopes and fears on trade talks flip-flop virtually every day? Apparently not, as the stock market only pays attention to the good news, and simply ignores any reports of difficulties. You can’t fight a market, even if it is being driven by “irrational exuberance”, but you can take a look at the “rational” data. Here goes.
Retail sales in October were ok at the headline, but the details were pretty mushy.
Overall sales rose +0.3% m/m, reversing September’s -0.3% loss, but on a y/y basis, sales still fell from +4.1% to +3.1%. Gasoline sales rose a sharp +1.1% m/m due to a jump in prices, but the y/y rate was still down -5.0%. Auto sale were also strong, gaining +0.5% m/m to a solid +4.5% y/y rate. As always, non-store sales (mostly e-commerce) were vibrant at +0.9% m/m and +14.3% y/y. But that’s where the highlights end. Keep in mind that e-commerce sales are still only about 12% of total retail sales. Other critical categories fell sharply; furniture and home sales -0.9% m/m, electronics and appliance stores -0.4% m/m, building material/garden stores -0.5% m/m, clothing and accessories -1.0%, sports/books/hobbies -0.8%, and an indicator of consumer discretionary spending, bars and restaurant sales, fell for the first time in 11months, losing -0.3%. Without the gains in gas and autos, sales were up a mere +0.1% m/m. And after stripping out other volatile items, core sales, which are an input to GDP, gained only a modest +0.3% m/m. And core sales on a y/y basis have dropped from +5.1% just two months ago to +4.2% currently. Finally, remember that retail sales are only 40% of all personal spending, that critical component producing 70% of all economic output, and that spending is drifting downwards as well.
Industrial production in October was dismal
Falling a sharp -0.8 m/m to -1.1% y/y, as the GM strike drove auto production down -7.1% m/m. As a result the critical manufacturing component fell -0.6% m/m to -1.5% y/y. But even after stripping out the decline in auto production, manufacturing fell -0.1% m/m to -0.6% y/y, the fourth consecutive y/y decline. Fourteen of 19 manufacturing industries are down y/y. Clearly manufacturing remains in contraction.
Both the NY Fed and the Atlanta Fed publish models which forecast GDP based on the available data reported to date. It’s true that we don’t have a lot of data to go on yet to estimate Q4 GDP growth, but after this morning’s two reports, both estimates fell sharply and are very weak. The NY Fed’s estimate is a mere +0.4% q/q annualized, while the Atlanta Fed’s estimate is +0.3% q/q annualized. How euphoric is that?