The Independent Market Observer

Monday Update: October Retail Sales Disappoint

Posted by Sam Millette

This entry was posted on Nov 23, 2020 12:54:29 PM

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In his Monday Update, Commonwealth’s Sam Millette highlights the disappointing October retail sales report, strong housing market updates, and more.Last week saw a number of important economic data releases, with a disappointing October retail sales report and strong housing market updates serving as highlights. This week will be busy, as well as holiday-shortened, with a focus on November’s consumer confidence reports, the first look at durable goods orders in October, and the monthly personal income and spending reports.

Last Week’s News

On Tuesday, the October retail sales report was released. Headline sales disappointed during the month, rising by 0.3 percent against forecasts for 0.5 percent growth. This result is a notable slowdown from the downwardly revised 1.6 percent growth in sales we saw in September, and it brought the pace of retail sales growth to its lowest level in six months. The weakness in sales was widespread, with clothing and restaurant sales showing notable declines. Core retail sales, which strip out the impact of volatile auto and gas sales, also disappointed, recording 0.2 percent growth against forecasts for a 0.6 percent increase. This report indicates that consumers were more cautious in October, likely due in part to rising health risks and declining federal stimulus payments during the month. Looking forward, continued modest growth in sales is quite possible. Still, the worsening pandemic in November will likely serve as a headwind for significantly faster sales growth for the time being.

Tuesday also saw the release of the October industrial production report. Production rose by 1.1 percent during the month, marking a better result than the 1 percent forecasted and a solid rebound following a 0.4 percent drop in September. The unexpected decline in September was driven in large part by a slowdown in manufacturing output. In October, however, manufacturing output was able to rebound with a 1 percent increase that was in line with expectations. The gains in manufacturing output were broad-based, with improvements seen across the consumer goods, business equipment, and construction supplies segments. Despite the October uptick, manufacturing output remains roughly 5 percent below pre-pandemic levels, highlighting the slower recovery for producers compared with consumers. That said, healthy consumer demand and low business inventory levels should support further manufacturing growth.

The third major data release on Tuesday was the release of the National Association of Home Builders Housing Market Index for November. This measure of home builder confidence blew past expectations, rising from 85 in October to 90 in November, against calls to remain unchanged during the month. This strong result brought the index to an all-time high, breaking the record previously set in October. Record low mortgage rates have continued to drive prospective home buyers to the market, which in turn has led to a surge in sales and home builder confidence. The index has seen an impressive rebound since hitting a lockdown-related low of 30 in April. Looking forward, supply remains low in key markets, which should continue to help support strong home builder confidence and construction.

We saw the positive impact from high home builder confidence with Wednesday’s release of the October building permits and housing starts reports. Starts were the highlight during the month, rising by 4.9 percent against calls for a 3.2 percent increase. Permits remained flat despite forecasts for 1.4 percent growth. Despite this disappointing result compared with the estimate, permits were left at their highest monthly level since 2007. Starts set a new post-lockdown high. The pace of single family home starts was even more impressive, hitting its highest level in more than 13 years during the month. Record low mortgage rates and shifting preferences for larger suburban homes have bolstered builder confidence and construction for this important sector of the market. Furthermore, builders have a sizeable backlog in permitted homes that have not yet started the construction process, which indicates this strong pace of construction should continue.

On Thursday, the initial jobless claims report for the week ending November 14 was released. During the week, 742,000 initial unemployment claims were filed, which is up from the 711,000 initial claims the week before and above estimates for 700,000 initial claims. This disappointing result marks the first increase in initial claims in five weeks. Rising public health risks likely acted as a headwind for further improvement for the job market during the week. Continuing unemployment claims, which are reported with a one-week lag to initial claims, fell from 6.801 million to 6.372 million, against forecasts for a more modest decline to 6.4 million. Regarding this result, however, signs show that some of the decline is due to claimants running out of eligibility rather than finding new jobs. This report, which will continue to be widely monitored, highlighted the very real risk that the pandemic poses to the ongoing economic recovery.

We finished the week with Thursday’s release of the October existing home sales report. Sales of existing homes beat expectations, rising by 4.3 percent during the month against calls for a 1.1 percent decline. This result brought the pace of existing home sales to its highest level since 2005, highlighting the impressive rebound in sales seen since lockdowns were lifted. Inventory remains a concern for future home sales, as the amount of homes available for sale was down nearly 20 percent on a year-over-year basis in October. Unsurprisingly, given the high demand and supply constraints, housing prices have seen a notable rise post-lockdowns, with prices up 15.5 percent on a year-over-year basis. Looking forward, the low inventory levels and high prices could certainly serve as a damper on overall sales growth. Still, as we saw in October, home buyer demand is very strong and is expected to serve as a tailwind for the time being.

What to Look Forward To

We’ll start the week with Tuesday’s release of the Conference Board Consumer Confidence Index for November. Economists expect to see the index fall from 100.9 in October to 98 in November. If estimates hold, this release would mark two straight months with declining confidence, echoing a similar drop in the previously released University of Michigan consumer sentiment survey. Historically, improving consumer confidence has supported faster spending growth. So, another month of decline would be concerning but understandable given the worsening public health picture over the time period. With that said, the index is expected to remain well above the lockdown-induced low of 85.7 it hit in April, signaling that consumers are weathering the third wave of the coronavirus with more resilience than at the start of the pandemic.

On Wednesday, the initial jobless claims report for the week ending November 21 will be released. Economists expect to see 728,000 initial unemployment claims filed during the week, marking an improvement from the 742,000 initial claims we saw the week before. If estimates hold, this report would signal that the increase in initial claims during the week ending November 14 was not the start of a trend of increased layoffs. Nonetheless, even if estimates prove accurate, the level of initial claims would be more than triple the weekly average from 2019. These numbers would indicate the labor market is still facing significant headwinds and should be monitored going forward.

Wednesday will see the preliminary release of the October durable goods orders report. Orders are expected to rise by 0.9 percent during the month, following a better-than-expected 1.9 percent increase in September. Core durable goods orders, which strip out the impact of volatile transportation orders, are expected to show a more modest 0.4 percent increase. Often viewed as a proxy for business investment, core durable goods orders are an indicator for the solid recovery in business spending we’ve seen post-lockdown. A further increase in October would show that businesses continued to spend despite the uncertainty caused by rising COVID-19 case counts and the November election.

The October personal income and personal spending reports will also be released on Wednesday. Spending growth is expected to moderate during the month, with economists expecting a 0.4 percent increase following a 1.4 percent rise in September. If estimates prove to be accurate, the numbers for spending growth would be in line with the slowdown in retail sales growth we saw in October. Income growth is also expected to slow, with economists calling for a 0.1 percent increase following a 0.9 percent rise in September. Income growth has been volatile since the pandemic began, as shifting government stimulus and unemployment benefits have caused large changes on a month-to-month basis. October marked the end of supplemental federal emergency unemployment benefits, which is expected to weigh on income growth despite the continued labor market improvement.

Wednesday will also see the release of the second and final reading of the University of Michigan consumer sentiment survey for November. The preliminary estimate for the month showed a surprising decline from 81.8 in October to 77 in November, but economists do not anticipate any changes for the final reading. Two primary factors led to the decline in sentiment: the spreading pandemic and the conclusion of the election in November. With more clarity on the political front, we saw a wide dispersion in responses from Democrats and Republicans. The Republican outlook fell notably in November, while the Democrat outlook held up well after rising notably in October. As with the Conference Board report, this survey will continue to be widely monitored by economists, to determine how the worsening public health picture will affect consumer spending and overall economic growth.

We’ll get another look at the housing market with Wednesday’s release of the October new home sales report. New home sales are expected to rise by 1.4 percent during the month, after declining by 3.5 percent in September. New home sales are a smaller and often more volatile portion of the housing market compared with existing home sales. If estimates hold, however, the pace of new home sales would sit at its second highest level in roughly 13 years, trailing only August’s recent high-water mark. Overall, the housing market remains healthy. A rebound in new home sales in October would be another sign that home buyer demand remains resilient despite the rising COVID-19 case counts we saw during the month.

Finally, we’ll finish the week with Wednesday’s release of the FOMC meeting minutes from the Fed’s November meeting. This delayed release of the meeting minutes is not expected to offer much additional information, given the evolving nature of the pandemic since the Fed’s meeting earlier this month. That said, the minutes may offer hints about potential future asset purchase plans and discussion regarding the election. The Fed did not make any major changes to monetary policy at the meeting. Given the continued pandemic and the associated risks to the economic recovery, the central bank is expected to remain supportive.

That’s it for this week—thanks for reading and have a happy Thanksgiving!

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