Same-Store Sales Ramp
The consumer did much better in August despite the elimination of the $600 in weekly unemployment benefits. That’s likely because of the improvement from people working and that more people have jobs. Redbook same-store sales growth was 4.6% in the week of August 29th which rose from 0.6%. This is great news because this is the back to school shopping season.
Some spending might be delayed depending on government restrictions. Specifically, Bill de Blasio is delaying NYC school openings by 11 days. Because last year schools opened normally, we might see an easier comp in early September as back to school shopping occurs later for New York City.
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Retroactive unemployment benefits could act as a mini-stimulus for consumers. The chart above on the right shows the lost wage payments from the executive order. There were barely any payments in the week of August 21st. They increased slightly in the week of August 28th because a few states started giving out the money.
That small increase isn’t why there was a large jump in Redbook same-store sales growth. However, the projected jump in payments in the week of September 4th might help maintain the uptrend. Giving people money never hurts.
Improving ISM Manufacturing
August manufacturing PMI was up from 54.2 to 56 which beat estimates for 54.5 and the highest estimate which was 55. The manufacturing sector is steadily improving as goods are outperforming services and this sector is used to rapid recoveries. We saw 2 downturns in the last expansion. COVID-19 crash was like a normal crash for this sector. This PMI is the strongest since November 2018.
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Once again, this headline reading was manipulated lower by inventories and customers’ inventories which fell 2.6 and 3.5 points to 44.4 and 38.1. The new orders index exploded 6.1 points to 67.6 which is the highest reading since January 2004. These surveys ask how business is doing versus last month which doesn’t mean manufacturing is doing well on an absolute basis.
At this point in the recovery, the sector has gone from sharply declining to a modest slowdown on an absolute basis. In July, yearly industrial production growth rose from -11% to -8.2%. With this great PMI, industrial production growth should get up to the low negative single digits. This was a very strong reading.
Production was up 1.2 points to 63.3. The employment reading rose 2.1 points to 46.4 which means employment is declining at a lesser rate. Luckily, this sector doesn’t employ many workers. After the last report’s decline in inventories, production needed to increase. With this latest decline and the backlog index rising 2.8 points to 54.6, production needs to increase further.
The manufacturing sector could be running hot by Q4. All of the top 6 industries expanded. This report is consistent with 3.9% GDP growth. The prices index rose 6.3 points to 59.5 which indicates inflation might be brewing. We need to see much lower continued unemployment claims before the Fed raises rates because of high inflation.
The comments section was optimistic as you would expect with these solid readings. A chemical products firm stated, “Business is very good. Production cannot keep up with demand. Some upstream supply chains are starting to have issues with raw material and/or transportation availability.” That means higher prices are coming.
A wood products firm stated, “Homebuilder business continues to be robust, with month-over-month gains continuing since May. The business remains favorable and will only be held back by supply issues across the entire industry.” Lumber prices are at a record high and the housing market is the hottest since the housing bubble.
COVID-19 Update
As you can see from the chart below, the population-weighted share of states with increasing new cases compared to 2 weeks ago is still low, but it increased slightly in the last week of August. The bad news is the percentage of states with over 100 cases per million per day is still elevated compared to April. That’s because the initial wave was mostly in a few states in the northeast. Even though it impacted fewer states, there were more deaths because the virus was in its infancy, meaning treatment wasn’t as good as it is now.
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Tuesday was a bad day for cases, but a good day for deaths since they fell from last Tuesday. Specifically, there were 41,979 new cases and 1,164 new deaths (7 day average fell to 934). There were 40,170 new cases and 1,290 new deaths last Tuesday. Deaths almost always peak for the week on Tuesday because fewer people die on the weekend. Tuesday is like the first day of the week when looking at the data.
Extreme Euphoria
Investors love the Citi panic euphoria model because it’s so clear. There isn’t much noise. As you can see from the chart below, since the tech bubble, it has hardly ever gotten to euphoria. When it has, it has left the category very quickly. That contextualizes this bubble because the index is the highest since the tech bubble. It’s at 1.2 and the record high was 1.5. This clearly shows the stock market is in a bubble.
Some people think those calling for a bubble are wrong when the market rises sharply. Big spikes further support the narrative that this is a bubble. However, it’s terrible for those betting that it will end by shorting stocks. It’s not that bad if you are indirectly betting against growth stocks by going long value and being underweight tech.
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Conclusion
Consumer spending growth increased throughout August despite the decline in fiscal stimulus. Manufacturing PMI increased in August which indicates industrial production will likely get closer to no growth. COVID-19 deaths are declining, but we aren’t at the point where the economy can go back to normal.
Indoor dining at NYC restaurants is staying closed. This is the 2nd most euphoric market we have seen since the late 1980s. A bubble in tech and growth stocks will end this year in my opinion.
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