KEY DATA: Sales: -0.3%; Vehicles: -0.8%/PPI: -0.1%; Goods: -0.2%; Services: -0.1%
IN A NUTSHELL: “It looks like consumers have pulled back and while declining energy costs should help, there are questions about how strong growth will be going forward.”
WHAT IT MEANS: Consumers are showing no signs of irrational exuberance. Actually, there were few signs of any exuberance in the latest retail sales report. Demand fell in September, but that was expected. August vehicle sales were off the charts so the easing back to a more sustainable level was known and factored in. Also, a sharp decline in prices was expected to cause gasoline purchases to drop, which they did. But even adjusting for those two, sales were still off as demand for building materials, clothing, furniture and sporting goods declined. We didn’t even shop online, which is a real surprise. So, where did we buy? Electronics and appliances, and while we were out, we ate out.
The one thing that could cause the Fed to dawdle is concern that inflation could become too low. The September wholesale prices report didn’t help ease the concerns of those on the FOMC who want to keep rates low for a considerable time. The Producer Price Index fell as costs of both goods and services were down. Energy led the way and that trend continues unabated. That is good for the economy as energy costs are more an indicator of consumer spending power than inflation. The drop is adding significantly to purchasing power. The only component where prices jumped was unprocessed consumer food products. However, that rise came after two months of huge declines. Meanwhile, processed food costs eased, though they had been rising sharply. Looking down the road, the rise intermediate and crude food prices indicates that consumer food costs will increase. Otherwise, the pipeline is largely empty so inflation should continue at a modest to moderate pace.
The New York Fed’s Empire State Survey dropped sharply in October. It remained positive. The headline overstates what happened. This is a diffusion index and most of the change came from respondents saying that activity remained the same rather than increased. There was little change in the percentage that said conditions or orders actually declined.
MARKETS AND FED POLICY IMPLICATIONS: It was expected that households would continue shopping for lots of things at a decent pace, but that didn’t happen and as a result, third quarter growth estimates could be revised downward. To the extent that issues such as Ebola and ISIL are causing confidence to ebb, the moderating sales may be temporary. But that is to be seen and since those two concerns have only deepened this month, I am not sure what to expect from the October retail numbers. This has to worry the Fed, which meets at the end of the month. With inflation below target and bond yields dropping, the doves will be flying high at the next meeting and we should expect that the “considerable timers” will rule the day. But for the markets, the turmoil in foreign economies, uncertainty about the Middle East and Ebola and the growing reality that 25% increases in equity prices is neither sustainable nor even rational, may be causing reality to set in.