US Retail Sales Preview: Stronger consumer sentiment may tilt consumption higher

• Retail sales are forecast to decline slightly in September.
• Control group input to GDP expected to be unchanged.
• Consumption supported by the labor market and rising jobs and wages.

The US Census Bureau will release its advance report on Monthly Sales for Retail and Food Services for September on Wednesday October 16^th at 12:30 GMT, 8:30 EDT.

Forecast

Retail sales are expected to drop  to 0.3% in September from 0.4% in August. Sales without automobile purchases are projected to rise 0.2% in September following August’s flat result.  The control group, sales excluding building materials, motor vehicles and parts and gasoline and food service receipts, which is used as the personal consumption component of the Bureau of Economic Analysis’ (BEA) GDP computation is forecast to be unchanged at 0.3% in September.

Retail sales economic growth

Retail sales have been a reliable contributor to economic growth for the last two quarters.

The control group category which is used by the BEA to calculate the consumption component of GDP averaged 0.733% from March through August.  If the September prediction is accurate at 0.3% the 6-month average will fall to 0.55% but even so it would still be the highest score for the five years to this June.

Reuters

Economic growth in the US has fallen from 3.1% in the first quarter to 2.0% in the second and is estimated by the Atlanta Fed to be 1.7% in the third.  

The decline has been due to the collapse in business investment as executives have adopted a wait and see attitude to the China US trade dispute before comitting to future spending. The pace of growth in the last two quarters reflects an active consumer and a largely inactive business sector.  

The recent provisional trade agreement between Washington and Beijing may begin to change business attitudes but substantial investment will likely wait for the actual deal to be signed by the two Presidents.  

The labor market

Household spending has been supported by the best job market in a generation.

Reuters

In September the unemployment rate dropped 0.2% to 3.5% as the economy created 136,000 new jobs and 45,000 were added to the July and August  totals.  Annual wages rose 2.9%, the first month without at least a 3% gain in 13 and the jobless rates for Hispanic and African-Americans reached historical lows.

Reuters

The NFP report helped to allay fears that the sharp decline in the manufacturing purchasing managers’ index this year and the drop into contraction in August and September was a forerunner for a generalized pullback in hiring.  

The labor force participation rate in September was unchanged at 63.2%. The under-employment rate fell 0.3% to 6.9% its lowest in 19 years and just above the all-time low of 6.8%.

September’s job report was an extension of the overall American economic picture for the last two years. The labor market continues to create more than enough jobs to cover the approximately 150,000 new entrants to the work force each month.

 The three month moving average for non-farm payrolls in September of 157,000 is down from January’s 245,000 but when combined with the backlog of unfilled position over the past three years it is more than sufficient to keep upward pressure on wages.  

Consumer sentiment

The summer decline in US consumer confidence cannot be attributed to dissatisfaction with employment or wages which remain at their best levels in decades. .

Sentiment in the University of Michigan Survey slipped 10.4 points from 102.4 in May to 92 in September. 

The Conference Board confidence score plunged from 135.8 in July to 125.1 in September.  

Reuters

By September both indexes were at the low side of their two year ranges.   

The deterioration in the Michigan consumer outlook had largely been a factor of concern for the future. Over the summer the expectations index had fallen about twice as much the current gauge generating most of the drag on the overall sentiment reading.

Reuters

In contrast October’s recovery in the Michigan sentiment number has been largely a project of the current index.

The Michigan sentiment score jumped to 96.0 from 93.2. The current conditions index rose 4.9 points from 108.5 to 113.4 while the expectation gauge increased just 1.4 points from 83.4 to 84.8 from 83.4

 All three indexes had been forecast to fall, sentiment to 92 from 93.2, current conditions to 107.5 from 108.5 and expectations to 81.7 from 83.4.

The improvement in consumer attitudes represented in the Michigan survey can only be improved by the tentative trade deal between the US and China. If that verbal agreement is followed by a signed agreement in a few weeks both consumers and the long-suffering business sector might find additional to be cheerful.

The Conference Board October confidence number will be released on October 29^th.

Federal Reserve and the dollar

The September NFP report mitigated some of the pressure on the Federal Reserve for another 0.25% rate cut at the October 29-30 meeting.  The FOMC has reduced the fed funds rates by 0.5% since July, citing global and trade threats to the US economy. 

A strong retail sales report would support the arguments of a number of Fed governors that the US economy does not need the simulative effects of lower rates.  It will also provide support for the dollar as it weans the market from excessive rate cut expectations.

Fed funds futures give a 75.4% chance for at the October 29-30 FOMC meeting about where they were a week ago.

Conclusion

The basic attributes of the consumer economy remain strong. Jobs are plentiful, wage gains are at a decade high, inflation is unthreatening and energy prices are falling.  

The recovery in consumer sentiment in the October Michigan Survey which was completed before the China trade deal announcement, can only be benefit from the agreement. Consumers have long listed the trade war as one their chief concerns.

While the unending partisan warfare in Washington is probably generating unease among consumers, Americans generally dislike the politics of the capital, household spending decision are dictated by the family bottom line. For the largest groups of workers and consumers the good times continue to roll. Expect that to be reflected in retail sales.