Latest Earnings Red Flags May Reflect Cracks in Labor Market, the Foundation of Consumer Spending
“After seven consecutive quarters of comparable sales growth, we experienced a deceleration in our third-quarter sales,” – Macy’s CEO Jeff Gennette in a statement accompanying the retailer’s earning release.
Retail was the big story this past week as many publicly traded companies reported earnings for the third quarter. The tone was … not positive. Macy’s stock fell 11% during the week after reporting the first decline in sales in nearly two years. Home Depot dropped 8% after a sales miss. Kohl’s fell by 19%, missing significantly while also lowering its outlook. Urban Outfitters fell by 19%. Nordstrom fell 10%. Only The TJX Companies — owner of discounters TJ Maxx, Marshalls and HomeGoods — and Target saw their shares rise after each reported strong quarters.
It is well established by now that the U.S. economy is heavily dependent on the consumer, so how worried should we be about the red flags waving in these retail earnings reports? Is this what a strong consumer looks like? The story feels like it is about more than just shoppers shifting to online spending.
Ultimately, consumer spending is built on the foundation of a strong labor market. While we continue to see job growth and low unemployment nationwide, cracks could be starting to show. We have seen job openings decline in recent weeks, and it seems employers could be actively laying off more workers. Weekly claims for unemployment insurance rose to 226,000 last week. While still very low from a historical standpoint, claims are up 15,000 in just two weeks.
The graphic below shows how the increase in unemployment claims looks at the state level, with the dark-colored states showing declines in weekly unemployment claims (good!) and the light teal states showing a rise (bad!). Weakness appears to be regional, focused largely on the Midwest and some scattered Northeast and Western states. However, the South remains the healthiest region.
Every state in what the Census defines as the South continues to see jobless claims fall, save Maryland and Oklahoma. The economy in Oklahoma is much more heavily dependent on oil than other states (8% of employment versus only about 0.5% nationwide). It has seen jobless claims rise as oil prices have declined from 2018 highs. And Maryland really isn’t even in the South, right?
Regional divergence in jobless claims seems driven by weakness in the manufacturing sector, on which Great Lake states are reliant. Manufacturing accounts for roughly 17% of that region’s gross domestic product compared to 11% in the U.S. as a whole.
We’ve noted in this space before how increased uncertainty causes a decline in business activity and a drop in hiring. It also typically spurs a drop in firing, as decision-makers wait to see how events such as the trade war situation play out. Is this dynamic beginning to change in a worrisome way?
That is hard to say, but if it was, you would see it first in areas of the country that are most at risk from the trade war. And it looks like that could be happening.
Fortunately for the economy, the consumer isn’t the only game in town. Housing continues to buck the otherwise weakening trend in most areas of the U.S. economy, with strong data out this past week.
The National Association of Home Builders’ Housing Market Index posted one of its best figures since the recession in its November report. The portions of the survey that asks homebuilders their thoughts on current sales, sales over the coming six months and foot traffic of prospective buyers have all substantially improved in 2019.
Housing starts and permits also reported a leap in the Census Bureau’s October report. By our back-of-the-envelope math, the rise in homebuilder sentiment and pace of new permitting is roughly equivalent to nearly a 1% boost to real GDP growth. With no trade deal signed yet and wavering hiring indicators, that 1% becomes essential.
We also see meaningful regional divergence in homebuilding activity. As the chart below shows, the Midwest is seeing declines in new building permits. The South also leads the way on new construction by a, ahem, country mile.
The Week Ahead …
Next week may be shortened by the Thanksgiving holiday, but there’s no lack of news packed into the days before. The housing data dump continues with new home sales reported on Tuesday. We get the second estimate of GDP in the third quarter on Wednesday, and with it personal income and spending data for October. Along with November Conference Board Consumer Confidence out on Tuesday, next week should continue to refine the condition of the consumer.
The Fed isn’t taking the week off, either. Chairman Jerome Powell speaks at 7 p.m. on Monday, followed by dovish Fed Governor Lael Brainard on Tuesday. On Wednesday, the Fed is scheduled to release the Beige Book, a collection of regional anecdotes on economic activity that inform its December meeting. Let’s see if this report confirms our previous insights of regional strength and weakness in jobs and housing activity.
A permanent disclaimer in this note: News on the trade war is always difficult to predict. That said, we anticipate more news on that front next week. Beyond the complications of the potential deal with China, the U.S. must decide on actions for tariffs against Europe soon. The House of Representatives is running low on time to pass the U.S.-Mexico-Canada trade accord known as USMCA.