CoStar Economy: The Ugly Truth Behind Some Good-Looking Consumer Numbers

November 29, 2019|Robert Calhoun and Matt Powers (Via: CoStar)

“Retailers mentioned higher costs, which contacts in some Districts attributed to tariffs. Firms’ ability to raise prices to cover higher costs remained limited, though a few Districts noted that companies affected by the tariffs were more inclined to pass on cost increases.” – Federal Reserve Beige Book, November 2019

Even in a holiday-shortened week, the data keeps rolling in. The end of the month served up lagging data for October (and some even laggier data for September), but also some leading data for November.

The second estimate of third quarter gross domestic product belongs to the former category. The data was revised higher, coming in at 2.1% versus 1.9% in the initial reading. While this is good, not much info is new about the economy. We’re now also closer to the end of the fourth quarter than the third.

The new estimate of GDP was revised higher partially due to greater spending, but mostly due to increased inventories (which tend to be an ephemeral source of growth, often reversing in subsequent quarters).

Looking ahead to fourth quarter GDP, new data shows a likely strong boost from a smaller trade deficit in October, and $4 billion better than in September. The story behind the numbers, unfortunately, is ugly.

The trade balance can improve even as U.S. exports decline, as long as imports decline by even more. That’s exactly what happened in October. Most notable in the details, imports of consumer goods fell by a sharp $2 billion from the prior month. As we have mentioned often recently, if the U.S. consumer is strong, data points like this and fresh signs of a retail slide are quite unusual.

The explanation for this dramatic shift is the imposition of U.S. tariffs on imports from China, which have been ramping up throughout 2019. With the threat of even more looming ahead in less than a month. The U.S. administration has generally avoided placing tariffs on consumer goods in its initial rounds, so any future goods hit by tariffs likely means more consumer goods will be impacted.

As we look at other recently released data, we continue to see a picture of a moderating economy struggling to stay “in a good place.” While manufacturing appears to be stabilizing, as seen in improvements to the Markit and Dallas Fed Purchasing Manufacturing Indexes, we continue to be more concerned about the health of the consumer.

The Conference Board’s Consumer Confidence Index, a favorite leading indicator of your authors, missed expectations in November’s release. The Consumer Expectations component bounced a little, but remains near the low end of the post-2016 range.

The Current Conditions component, however, gives further evidence of a noted concern of ours: the labor market may be softening. For the first time since 2010, consumers are saying their present situation is worse than it was a year ago. This typically means worse labor outcomes.

The Week Ahead …

The news stays busy, giving no time to recover from Thanksgiving hangovers. Friday’s jobs report should testify on whether all of our hand-wringing on a weakening labor market has been worthwhile. Not mentioned above, the recent decline in initial jobless claims eased some concerns, but far from conclusively.

Businesses report confidence levels to the Institute of Supply Management Monday. Also, the manufacturing sector report comes out the same day, with nonmanufacturing following on Wednesday.

The Federal Reserve is likely to be quiet leading into its final meeting of the year from Dec. 10 through Dec. 11. In his latest remarks, Chairman Powell admitted the central bank has reassessed its estimate of the neutral rate downward this year. This has been based on low inflation in spite of such low unemployment.

Between the chairman’s comments and another inflation miss, (the core personal consumption expenditure price index saw a mere 1.6% gain YOY) the committee is likely to continue to signal inaction.