INDICATOR: September Retail Sales and October Empire State Manufacturing Survey
KEY DATA: Sales: 0.1%; Ex-Vehicles: -0.1%/ NY Fed: +2.1 points; Orders: +6.0 points
IN A NUTSHELL: “Consumer spending momentum is moderating and the hurricanes didn’t help.”
WHAT IT MEANS: Some of the final data for the third quarter are coming in and while they look good, growth is not likely to be close to the robust second quarter gain. Consumer spending on retail products sagged in September. A major reason was a sharp reduction in restaurant demand, some of which was probably due to Hurricane Florence. Other data sources, such as TDn2K’s, point to more solid gains in restaurant demand, so it doesn’t look like families have decided to boycott restaurants. Gasoline and health care purchases were also down. Offsetting those declines were strong increases in demand for vehicles, furniture, clothing, sporting goods, electronics and appliances. We also bought a lot of stuff online. So, taken together, this was a report that was probably skewed by events, not one that shows softening spending habits.
Meanwhile, manufacturing looks like it is still in great shape. The New York Fed’s October measure of New York area manufacturing was up, led by a sharp increase in new orders. Firms have been shipping like crazy and that led to a softening in backlogs. They are still hiring, but not as rapidly as before and are no longer extending out working hours. Looking forward, confidence is still good, but the trend has been down for most of the year. Firms have become more conservative in their expectations about hiring and investment. The capital spending high we saw earlier in the year has largely disappeared.
MARKETS AND FED POLICY IMPLICATIONS: The first guess (called the Advance Estimate) of third quarter growth will come out on October 26th. It looks like it will be in the 3.25% to 3.75% range (I am toward the lower end of the range). That is really good in that it is well above trend. But we knew, given the massive tax cuts and government spending increases that we would see strong growth this year. What economists are debating is how long the sugar high will be sustained. I have been contending that consumers are pretty much tapped out and that we could start see slowing demand as early as the fourth quarter. What is needed, I argued, is stronger future capital spending. I keep looking for signs of that happening, but they just don’t seem to be there. The surveys are not that optimistic. In the New York Fed’s report, expectations on capital and technology spending are back to where they were before the tax cut was passed. The euphoria of early this year is gone and it looks like investment levels could be trending down toward more typical levels, not the elevated ones hoped for when the passed was being hyped and passed. So, while we should get a good third quarter growth number and the expansion should be solid well into next year, more typical 2% to 2.5% rates are likely to start appearing in the second half of 2019. That is when most economists expect the sugar high to have worn off. At that point, it may be only the government that is driving growth and that is not the kind of economy we can bank on. I am an economist not a psychologist so I don’t have any idea whether the recent hits to the stock markets have change outlooks. Investors have been following the “I will believe it when I see it” philosophy and until that slowdown actually appears, who knows where the markets will go. But it is hard to see how the economy can keep up the roughly 3% pace we should post this year and at some point, that likelihood has to be factored into earnings growth and equity prices.
Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.
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