Economic Perspectives Update

Retail sales increase modestly

Retail sales increased 0.3% in October, nearly reversing a similar drop in the prior month, and above the consensus of 0.2%. Individual categories were mixed. Vehicle and gas station sales increased 0.5% and 1.1%, respectively. Excluding these two categories, sales were up a modest 0.1%. While online sales continued to advance, up 0.9%, apparel dropped 1.0% and restaurant sales fell 0.3%, down for the first time this year. The two home-related categories (building materials and furniture) also pulled back, suggesting some potential weakness in housing demand.

On a y/y trend basis, retail sales were up 3.8%, which is weaker than where they were in mid-2018, but better than earlier this year. Our measure of discretionary retail sales and its core increased 4.9% y/y and 5.5% y/y, respectively, also stronger than earlier this year. This suggests that the pullback in consumer comfort over the past several weeks has not impacted consumer demand. The trends in retail sales, which account for about 1/3 of consumer spending, support a continued moderate pace of economic growth.

GM strike weighs on industrial production

Industrial production dropped 0.8% in October, down in three of the past four months, and by the most since May 2018. This was worse than the consensus of -0.5%. Due to the GM strike, vehicles output sank 7.1%, the most since January. Industrial production ex-vehicles was down 0.5%, as output growth across most sub-sectors weakened. Manufacturing ex-vehicles was down 0.1%, led by durable goods. Utilities output fell 2.6%, while mining fell 0.7%. Core industrial production, which excludes vehicles, energy, and high-tech, fell 0.2%, led by materials.

On a y/y basis, industrial production fell 1.1%, the most since October 2016. Manufacturing output shrank 1.5% y/y, down for the fourth straight month and by the most since May 2016. Utilities contracted 4.2% y/y. Mining output eked out 2.7% y/y growth, a fraction of the double-digit pace in 2018 and early-2019.

With the GM strike idling capacity, the utilization rate fell 0.8 ppt, the most since March 2009, to 76.7%, its lowest level in more than two years, and worse than the consensus of 77.0%. It was 3.1 ppt below the 1972-2018 average, indicating excess capacity which tends to be disinflationary. Separately, our Inflation Timing Model picked up six points to -2 last month, a level that is historically consistent with moderate disinflation.

Import prices decline 

Import prices fell 0.5% in October, a steeper decline than the consensus of -0.2%. It was led by a 2.9% slide in fuel prices, mostly petroleum. But nonfuel import prices also fell, down 0.2%, led by nonfuel industrial supplies and materials (mostly unfinished metals). On a y/y basis, import prices sank 3.0%, the most since July 2016. Prices from most trading regions declined, reflecting the strength of the U.S. dollar.

Source: Ned Davis Research