11/14/2014
By Jennifer Coombs

Of all the economic releases on the morning of November 14th, the most impactful was likely the preliminary November reading for the University of Michigan’s Consumer Sentiment Index. Going into the holiday shopping season, the initial sentiment reading came in at 89.4 after October’s final reading of 86.9 and the initial October reading of 86.4. Strength is being attributed to the current conditions component, which was up nicely by 4.7 points since the final reading in September to 103.0 this month. This reading gives an early indication of the November-versus-October comparison in consumer activity, and it’s a very positive indication. The expectations component is showing less strength and less monthly acceleration, but it’s still a respectable reading at 80.6. All of these readings are at the highest levels since 2007. Although this is just the preliminary release, the Michigan report offers new indications of future strength of consumer sentiment.

A pop in consumer optimism should be a huge help for retail sales going into November. However, in October retail sales were slightly up, despite the downward headwinds from low gas prices. In October, retail sales popped 0.3% after falling by 0.3% back in September, and analysts had forecasted a 0.2% increase for the month. Auto sales made a slight rebound of 0.5% reflecting new vehicle sales after falling by 1.2% in September and increasing by 1.8% in August. When autos are excluded from the number, sales increased by 0.3% while there was no change in September. Gasoline station sales fell 1.5% in October after falling by 0.8% in September. When autos and gas are excluded, sales actually jumped 0.6% in October after a 0.1% increase in September, while the market forecast was for a 0.5% increase. Moderate strength was witnessed at non-store retailers, sporting goods & hobbies, food services & drinking places, and miscellaneous store retailers. On the other hand, department stores and electronics & appliance stores declined for the month. Overall, the report is positive since gains in the individual components were broadly based and consistent with gains in confidence as well as the weekly jobless claims.

Import and export prices were actually a bit on the negative side in the month of October. Import prices declined by a rather steep 1.3% which not only marks the fourth straight month of declines, but it’s the steepest decline in roughly two and a half years. This was largely due to oil and petroleum prices being so low, down 6.9% for the month. However, even when petroleum products are excluded, prices were still down 0.1%, which is the same amount in September and August. On a year-over-year basis, total imports prices were down 1.8%, however when petroleum-related products were excluded prices were actually up 0.5% year-over-year.                    

On the export side, there is a similar story; prices were down 1.0% in October for the third month in a row. The US primarily exports agriculture products, and during the month related exports were down 2.1% for the fifth straight month of declines. Year-over-year, export prices were only down 0.8% when agricultural products were excluded. However, when agricultural products were included the prices of exports are down a whopping 4.6% year-over-year. We note that international price pressures are clearly deflationary at the moment, which might be a problem for policy makers who, in the US, Europe and Japan, are fighting to reverse that downshift. This report ought to point to a very weak report for the producer (PPI) and consumer (CPI) price indexes next week.

Last, but not least, the business inventories reflected the data noted in factory orders and wholesale inventories. For September, inventories were up 0.3% which increased slightly relative to sales, but didn’t change the inventory-to-sales ratio which held steady at 1.30. Retail inventories piled up a bit from August and resulted in an inventory-to-sales ratio of 1.42 in September versus 1.41 the month before. However, the retail sales report from this morning is indicative of some easing for this ratio in the coming months. The other two components’ ratios, for manufacturers and wholesalers, were unchanged in September at 1.30 and 1.19 respectively. On a national scale, inventories look to be balanced right now going into the holiday shopping season, especially since consumer sentiment is much higher.

Jennifer Coombs
Wall Street Strategies

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