Slight Improvement In Empire Fed Index

October Empire Fed manufacturing index was just like the University of Michigan consumer confidence index in that it was expected to fall, but it rose. Empire Fed index was different because on an absolute basis it was weaker. Specifically, expectations were for it to fall from 2 to 0.8 and it rose to 4 as you can see from the chart below. 

This was near the high end of the estimate range which was 5.1. Most economists thought it would fall which makes sense since the manufacturing sector has been weak and trending in the wrong direction.

This could be an early indicator that growth is bottoming. We will need confirmation from the other regional Fed reports and the September industrial production report which comes out on Thursday. Expectations are for monthly growth of -0.2% on top of 0.6% growth. Manufacturing growth is expected to be -0.3% after rising 0.5%. Let’s see if yearly growth is positive or negative. I’m not expecting a big turnaround, but it would nice to see an improved 2-year growth stack.

(Click on image to enlarge)

Now let’s review the details of the report. New orders showed no change as it stayed at 3.5. The shipments index increased sharply from 5.8 to 13. Just like expectations for inflation in the University of Michigan report, the inflation metrics fell in this report as priced paid and prices received fell 6.3 and 2.9 points to 23.1 and 6.3. The expectations index rose 3.4 points to 17.1. This is unlike the September report which fell 12 points.

In the last report, we needed to temper our enthusiasm because expectations were so weak (the general conditions index only fell slightly last month). Many of the other regional Fed reports also showed weakness in expectations in September. Hopefully, this is a new trend where expectations improve. New orders index rose 1.6 to 23.5 and shipments fell 1.5 to 18.9. After huge drops, tech spending and capex improved modestly. They were up 2.3 and 4.2 points to 8.8 for both.

Weak Redbook Sales Growth

Bears have recently attacked the Redbook same-store growth report by stating discount sales growth has been much higher than department store sales growth. That differential has widened before the past 2 recessions. Department store same-store sales growth has actually been modestly negative. 

Based on the Redbook reports from September, I still expect solid retail sales growth to come out on Wednesday. Expectations are for monthly growth of 0.3% following 0.4% growth and for 0.3% monthly control group sales growth which is the same as August.

With that all being said, the Redbook sales growth reading in the week of October 12th showed only 4.1% growth which was down from 5.7% growth in the prior week. This might only be one week of weak data, but if it continues, the bears won’t need to go after this reading. It will be in line with their expectations for a slowdown. 4.1% growth is the lowest growth since July of last year. 

Keep in mind, that October isn’t that important of a month for consumer spending compared to November and December. This is only a bad signal for Halloween related sales. It could be bad for Party City stock. Year to date, Party City stock is down huge, but it is up 53.92% from August 15th.

Another aspect to keep in mind is Redbook sales growth will have impossibly tough comps in November and December. On the other hand, the more important retail sales and PCE reports will have very easy comps in December. I’m looking for solid growth in December. 

One final important thing to consider is this year Thanksgiving is much later. Thanksgiving went from November 22nd in 2018 to the 28th this year which means there is 1 less week of holiday shopping. Sales will also be pushed further into December. November sales growth will be hurt, but Black Friday sales might be helped. There is more time for shoppers to save before the big sales event. Colder weather encourages people to shop for the holidays.

The Trend In Employment Signals 2019 Hasn’t Been Terrible

It’s clear payrolls growth has fallen sharply this year. However, some view this simply as a continuation of the downtrend which was temporarily reversed in 2018 because of the fiscal stimulus. In the chart below, you can see the bump higher in job growth compared to the dotted line which shows the trend. 

As the table shows, service sector payrolls growth was 1.565 million in 2017 and it’s 1.528 million in 2019. With the labor market relatively full, it wouldn’t be problematic if payrolls added just kept up with population growth.

(Click on image to enlarge)

This entire line of thinking is different from those who say there is still plenty of room to reach full employment. They say job growth has fallen because of cyclical demand weakness. The economy is definitely in a cyclical slowdown, but we haven’t seen jobless claims spike. Job cuts spiked earlier in the year, but they have recently fallen. 

We will get an answer to the question of whether cyclical weakness is causing the decline in payrolls growth or if the labor market being nearly full is limiting growth when 1 of 2 things happen.

The first possibility is the cyclical weakness continues and payrolls growth falls below population growth. Then we’d know the cyclical weakness is causing the decline in payrolls growth. A second possibility is the cyclical economy improves and payrolls growth remains weak. Then we know payrolls growth is weak because the labor market doesn’t have much slack left.

Conclusion

There was a slight improvement in the Empire Fed manufacturing index; Redbook same-store sales growth fell sharply in what isn’t an important week for the consumer. I don’t know if this is an early tell about the holiday shopping season. I’m more concerned with income growth which will be updated on October 31st. 

Payrolls growth has fallen this year compared to last year, but that might have more to do with the bump related to the fiscal stimulus than actual cyclical weakness. Economic growth is definitely below last year, but it’s above the trough in 2016.