Before The Bell: S&P 500

Retail Sales Fall – Cooling Economy & Market Pull Back?

Today’s U.S. retail sales undershot estimates with a -1.1% November headline drop and -0.9% ex-auto decline, following net downward revisions that lifted September but lowered October, hence lifting Q3 consumption before a Q4 drop. The retail sales pull-back in October and November capped a string of new all-time highs between July and September, following the cycle-low in April, with large recent declines in the components that were most sharply hit in the lockdowns earlier this year. We now expect a Q3 GDP growth boost to 33.3% (was 33.2%) from 33.1%, but we lowered our Q4 GDP estimate to 6.0% from 6.4%.

Cutting through the noise, we believe that the economy could be cooling down. This could trigger a market pullback or dip if the trend continues. Here are some key numbers:

  • Retail sales fell -1.1%, after swings of -0.1% (was 0.3%) in October and 1.7% (was 1.6%) in September.
  • Retail sales ex-autos fell -0.9%, after swings of -0.1% (was 0.2%) in October and 1.4% (was 1.2%) in September.
  • Retail sales ex-autos, gasoline, and building materials fell -1.0%, after swings of -0.1% (was 0.1%) in October and 1.4% (was 1.2%) in September.
  • The MBA purchase index rebounded 1.8% in the second week of December, after a -5.0% drop but 9.0% surge in the week before that.

Retail sales have climbed by 32.4% between April and November after a -21.7% drop between February and April, leaving sales now 3.6% above the February level. Service consumption in the GDP accounts is rebounding more slowly, leaving a weaker path for total consumption that has yet to set a new high.

We saw big November declines for components that exhibited out-sized weakness with lockdowns earlier this year. We have a -6.8% drop for clothing in November after a prior -3.4% (-4.2%) slide. Department store sales cratered -7.7% following a prior -4.9% (was -4.6%) drop. Electronic store sales tumbled -3.5% after a 1.1% (was 1.2%) increase in October. Eating and drinking establishments saw sales fall -4.0% from -0.4% (was -0.1%).

Nonstore sales rose 0.2% in November with likely help from the shift in holiday shopping away from retail locations with the coronavirus, following a 2.4% (was 3.1%) October surge that was attributed to the shift in “Amazon Prime” day to October 13-14 from the typical mid-July date.

We saw a -1.7% November drop for motor vehicle and parts sales that chased the -4.5% unit vehicle sales drop, following modest revisions that left respective October swings of zero (was 0.4%) and -0.1%.

Building material sales rose by 1.1% in November after downward revisions, which left the measure in line with assumptions. The rise further closes the undershoot versus other robust housing data. The increase tracked a 27k November construction employment gain and a 0.6% November rise for construction hours-worked.

Gasoline station sales fell -2.4% in November, with restraint from a -0.4% November CPI gasoline price drop, following respective October figures of -0.2% (was 0.4%) and -0.5%. (We warned Monday in the Advisor Market Report about a potential drop in energy oil stocks/ETFs being overpriced)

We expect November personal consumption expenditure (PCE) gains of -0.2% in nominal terms and -0.3% in “real” terms. We assume 0.1% November PCE chain price gain and a flat core figure, alongside 0.2% CPI gains for both.

The savings rate likely fell to the 13.4% area in November from 13.6%, as we further unwind the 33.7% all-time high in April attributable to CARES Act payments to households via direct checks and federal jobless benefits.

We expect a Q3 GDP growth boost to 33.3% from 33.1% with a $2 bln hike for goods consumption. This should join revisions of $4 bln for inventories, $2 bln for service consumption, $1 bln each for intellectual property investment, residential investment, and public construction, -$1 bln for net exports, and -$2 bln for nonresidential construction.

Our Q4 GDP estimate was lowered to 6.0% (was 6.4%), with 4.2% (was 5.8%) growth in real consumption after an estimated 40.8% (was 40.6%) pace in Q3. We saw Q2 contraction rates of -31.4% for GDP and -33.2% for consumption.

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