Another Manufacturing Slowdown Without An Economic Recession

July monthly reading for sales growth was fantastic. However, the industrial production report was weak. It appears in the 2nd half of 2019 heading into early 2020, there will be another manufacturing recession, but consumption growth will be solid. That would make this situation like 2015-2016. There are 2 key differences though. 

First is there isn’t a fiscal stimulus this time as the government is actually dragging growth with its trade war. The 2nd difference is the Fed is now cutting rates while it had just started raising rates during that slowdown. Monetary policy was slowly going from easy to tight while now policy is more quickly going from tight to loose.

A determining factor as to whether this slowdown becomes a recession might be the housing market. Real residential investment growth has been a drag on GDP growth for 7 straight quarters. With the decline in interest rates, housing is getting more affordable. That could cause a burst in new homes sales. In June, the housing affordability index increased 10.3% nationally as compared to June 2018. 

West and the South had the largest increases as their affordability gains were 12% and 11%. In this period, median new single-family home prices were up 4.5%, median family incomes were up 3.5%, and mortgage rates fell 93 basis points. Since mortgage rates fell in July and August, (average 30-year fixed rate currently 3.6% which is a 3 year low) the housing market might finally help GDP growth.

Very Strong Retails Sales Growth

Each category in the retail sales report beat estimates and the June readings were only revised slightly lower. This was a great report. As you can see from the chart below, monthly headline retail sales growth was 0.7% which more than doubled estimates for 0.3% growth. June’s sales growth was revised down a tick to 0.3%. On a yearly basis, advanced retail sales growth including food services was 3.4% which increased from 3.3%. This is the best reading since April. That’s very high yearly growth because the comp was 6.5% growth. July 2018 had the highest growth since February 2012. The 2-year stack increased solidly because June 2018’s growth was 6.1%. That’s a rounded 2-year stack improvement of 0.5%.

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Excluding autos, monthly retail sales growth was even stronger. It increased from 0.3% to 1% which more than doubled estimates for 0.4%. The June reading again was revised down by a tick. Auto sales fell 0.6% in June. Yearly, its growth fell from 3.3% to 2.3%. That was one of the few blemishes on what otherwise was a fantastic report. Excluding autos and gas, monthly sales growth was 0.9% which beat estimates for 0.5% and June’s reading of 0.6% growth. Once again, June’s reading was revised lower by a tenth. Gas stations had 1.8% monthly growth and their yearly growth improved from -1.04% to 3 basis points.

Control Group Was Fantastic: The Specifics Of The Retail Sales Report

Yet again, the control group had fantastic sales growth. This explains why I have described the June and July reports so glowingly despite their mediocre headline yearly sales growth (also headline yearly comps were tough). Monthly control group retail sales growth was 1% which beat estimates for 0.3%. Just like every other part of this report, control group sales growth beat the high end of the estimate range. Unlike the other parts, June’s growth rate wasn’t revised lower. As you can see from the chart below, the quarter over quarter annualized control group growth rate was 9.7%. It has been in the high single digits/low double digits for the past few months. Yearly growth improved from 4.5% to 4.9%.

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The details of this report were mostly great. The best part of this report was online stores. This group had monthly growth of 2.8%. Yearly growth improved from 14% to 16%. That’s the highest growth rate since December 2000, back when online sales were a very small portion of total sales. This category has now gotten so large, it can drive the total higher. As of Q1, e-commerce was 10.2% of the total. In this report, it had a weighting of 12.81%. It drove growth by 0.36% which means it drove slightly more than half of monthly headline growth.

Autos and auto parts had a 19.72% weighting and hurt monthly growth by 11 basis points. The bellwether food and beverage stores category had 0.6% monthly growth and 3.44% yearly growth which was up one one-hundredth of a point from June. That’s the highest yearly growth rate since January 2019.

Jobless Claims Increase Slightly

Jobless claims increased from 211,000 to 220,000 which was 12,000 above estimates. The 4 week moving average increased 1,000 to 213,750. Even though claims were modestly higher, they still show the labor market is strong. It’s entirely possible August retail sales growth is just as strong as July’s growth rate. The economic data on Thursday, which includes the retail sales report, caused Merrill Lynch’s Q3 GDP growth tracking estimate to increase 0.4% to 2.1%. Continuing claims were a weak spot in this jobless claims report as they increased 39,000 in the week of August 3rd. The 4 week average was up 9,250 to 1.697 million which isn’t problematic yet.

Conclusion

The calls for a recession due to the yield curve inversion look incorrect now that the latest retail sales report showed the consumer is in solid shape. Consumers might even be able to whether the storm that are the tariffs since some items typically bought during the holiday shopping season will temporarily avoid them. Of course, if this cycle is an average one, the yield curve inversion implies a recession will occur late next year. The retail sales report simply tells us it’s unlikely for there to be a small gap between the inversion and the next recession. Reports like this explain why stocks do well after inversions and before recessions. The jobless claims report was also solid, implying retail sales growth can also be strong in August. On Friday, the August preliminary consumer sentiment report will give us an idea if that assertion is valid.