KEY DATA: Sales: +0.3%; Ex-Vehicles and Gasoline: +0.4%/ IP: -0.3%; Manufacturing: -0.1%/ Import Prices: 0%; NonFuel: +0.2%; Exports: +0.7%; Farm: +2%
IN A NUTSHELL: “The start to the year was pretty mediocre for consumers and manufacturing.”
WHAT IT MEANS: With the coronavirus and Boeing leading the way, the first quarter of this year is expected to be pretty slow and the first set of data seem to point to that being the case. Take consumer spending, please. Retail sales were mediocre in January and they reached that disappointing level only because people were able to get out and do some work around the home and visit their favorite restaurant. Building materials and food services were up strongly. There was a pick up in furniture demand but electronics and appliance stores did not do well. Gasoline sales fell, but so did prices a little, so don’t look into that too much. Clothing purchases, which had soared in December, came crashing back to earth in January. There was really nothing pretty in this report. The one thing that is keeping consumer demand strong is consumer confidence and the University of Michigan’s mid-month February estimate posted a gain.
Industrial output fell sharply in January as both weather and Boeing did a number on production. The warm weather (you notice I didn’t say global warming because we know that doesn’t exist) led to a sharp drop in utility production. Boeing’s 737 Max assembly line halt created an equally massive decline in aerospace output. The saving graces for this report were strong increases in vehicle, petroleum, plastics and computer production. That kept the manufacturing decline from being really ugly.
On the inflation front, there isn’t much. Import prices were flat in January, though there was a moderate uptick in nonfuel costs. Food import prices were up as were imported vehicle costs. On the export side, agricultural prices jumped. Chinese demand for pork is surging due to the swine flu and that is helping farmers. It is unclear what the coronavirus will do to agricultural sales to China over the course of the year, but it is not helpful right now and that may wind up depressing U.S. food costs this spring. MARKETS AND FED POLICY IMPLICATIONS:Estimates for the first quarter are running well below 2% and today’s data do nothing to change expectations. The coronavirus impacts are just starting to show up and the longer this problem goes, the greater the impact. Don’t forget that China is critical to large segments of the world economy including many non-industrialized and industrializing nations as well as the EU. There are many countries that will be hurt significantly if this doesn’t end soon and there is little reason to expect it to do so. The same can be said of the Boeing shut down. The company wants to start back up before getting final approval but no one knows when that will be. The first quarter for Boeing and their suppliers is lost and it is likely the same will happen in the second quarter. Right now, most economists have not included a significant impact of the coronavirus in the second quarter (I am one of them), so there are hopes conditions will be a little better in the spring. The best I can say about that is maybe. With that in mind, it is hard to rationalize the exuberance in the equity markets, at least if you believe the economy actually matters. The latest Blue Chip consensus has growth at or below 2% for every quarter in both 2020 and 2021. That is not a forecast that says happy days are here again and that investors should go all in. But they seem to be doing that so it should be interesting to see what happens if growth does disappoint. Or, maybe investors actually like 2% growth. Economists do, but that level of growth is hardly a prescription for strong earnings growth.