Strong Control Group - Real Wages

The monthly decline in weekly hours worked hurt real weekly wage growth. But overall the November growth was still positive which means there was an improvement. This has been a relatively strong cycle for real wage growth. You can’t expect growth to average 1%-2%. Anything positive is good news.

Wage growth at the end of the last recession isn’t powerful because there was a high unemployment rate. It’s not ideal to have an unemployment spike and inflation crater.

In July 2009, headline CPI was -1.96% and the unemployment rate was 9.5%. The economy is currently in the ideal situation because the labor market is nearly full, and inflation is controlled.

U.S. production of oil helps this real wages because the energy industry creates jobs and lowers oil prices which have a big effect on headline inflation.

As you can see from the chart below, average weekly earnings growth fell from 0.8% to 0.5%. My prediction for strong real wage growth in Q4 was partially foiled by the decline in hours worked.

However, the numbers can be revised, and we still have December to show improvement. Headline inflation has been declining and the labor market is tightening. This is the best combination for strong real wage growth.

Average hourly wage growth improved from 0.6% to 0.8%. This is up from the 0.1% decline in July. Based on this metric, my prediction was accurate.

Production and non-supervisory employees average hourly and weekly earnings growth were both a strong 1%. They increased from 0.4% and 0.5% growth respectively.

Strong Control Group - November Retail Sales

Real wage growth gives you a great backdrop for understanding retail sales growth. November retail sales growth was solid. Month over month headline sales was up 0.2% which beat estimates for 0.1% growth.

The October report was revised to show 1.1% growth instead of 0.8% growth. Retail sales growth without autos was 0.2% which matched estimates. The October reading was revised 0.3% higher to 1%.

Retail sales without autos and gas was 0.5% which beat estimates for 0.4% growth. The October reading was revised from 0.3% to 0.7%.

Strong Control Group Growth

The best part of the report, which is also the most important part, was the control group. It had sales growth of 0.9%. It beat estimates for 0.4% growth and the high end of the estimate range which was 0.5%.

October’s reading was revised up from 0.3% to 0.7%.

As you can see from the chart below, these revisions made October a great month.

The decline in oil prices brought down headline sales growth, but the control group shows the consumer is still strong. Even with the decline in gas, year over year growth excluding food services was 4%.

This looks much different from the 2015-2016 slowdown as growth had a one handle 12 times in those 2 years. On the other hand, growth was 5.5% in November 2007 which was 1 month before the start of the recession.

Retail sales growth is weak during recessions, but it isn’t a leading indicator because it relies on the labor market which is a lagging indicator.

Firms don’t start firing workers until there is a sharp decline in sales. They can’t afford to fire people when there is a mild weakness because they would lose talent during every modest slowdown.

Strong Control Group - Details Of The Retail Sales Report

The 0.7% year over year decline in auto sales helped bring down the headline growth rate. That was an improvement from the 3.7% decline in October.

Month over month gas sales fell 2.3% because of the decline in oil prices. Restaurant sales fell 0.5% which isn’t what you’d expect given the decline in oil prices and strong consumer confidence.

Building materials sales fell 0.3% monthly. All these metrics are in the headline result. But not in the control group, explaining why the control group outperformed by so much.

Now let’s review data points in the control group which helped it on a monthly basis. E-commerce sales were up 2.3% month.

This segment had a great Black Friday and Cyber Monday. Electronics & appliances, furniture, and health & personal care stores saw monthly growth of 1.4%, 1.2%, and 0.9%. Even general merchandise and department store sales were up 0.4%.

On a year over year basis, the control group was up 4.4%, which also beat the total sales growth rate which was 4.2%. Sales ex-auto were up 4.9% and sales ex-auto ex-gas were up 4.6%.

The chart below shows retail sales’ line item growth which adjusts for inflation and weight. As you can see, it has decelerated.

Strong Control Group - Weak December Markit PMI

The December flash Markit PMI was weak which could signal the economic slowdown is gaining steam. However, it could also be a fluke because the flash readings are revised after the month is over. The composite index was 53.6 which is down from 54.4.

This was the weakest reading in 19 months.

The services index fell from 54.4 to 53.4 which is the lowest reading in 13 months. As you can see from the chart below, the future services expectations index just hit a 30 month low. The services index outperformed manufacturing during the 2015-2016 slowdown.

If both sectors fall in 2019, it could lead to weaker conditions than in early 2016. The manufacturing PMI fell from 55.4 to 53.9 which is the worst reading in 13 months.

In the comment section of this report, the Chief Business Economist of Markit stated this report implies GDP growth of 2%-2.5%.

That’s interesting because the retail sales report helped to push the Atlanta Fed GDP now estimate from 2.4% to 3%. Furthermore, this PMI is consistent with 180,000 jobs created in December. That would be an increase over last month.

The NY Fed Nowcast wasn’t affected much by the retail sales report as it is at 2.42% which is in the Markit range. The NY Fed’s Q1 2019 Nowcast expects 2.4% growth. I only find this interesting because so many prognosticators are calling for a recession in 2019 because the stock market is falling.

Stocks always fall during recessions. But there aren’t always recessions after stock market corrections.