- The weakness in manufacturing continued to be broad-based in September, led by a decline in auto production relating to the General Motors strike, though there are early signs that the manufacturing conditions may soon stabilize.
- Housing starts and permits were both solid in the third quarter.
- Retail sales were weaker than expected in September but consistent with our view that the midyear pickup in real sales growth was somewhat unsustainable.
- The Atlanta Fed's GDPNow--our preferred real-time growth tracker--is showing third-quarter growth running at 1.8%, unchanged from two weeks ago and slightly under our third-quarter growth forecast of 2.1%.
Manufacturing Industrial Production Is Showing Early Signs Of Bottoming Out
Following a solid August (on a monthly basis), industrial production declined 0.4% in September, with drops in manufacturing (-0.5%) and mining (-1.3%) more than offsetting the increase in utilities production (+1.4%).
The increase in utilities production in September was due to unseasonably warm weather that increased demand. This will be reflected in strong consumption of energy services in third-quarter GDP. Mining fell on weaker oil and gas extraction and mining support services (including drilling activity), which was not surprising given the decline in crude oil prices has soured enthusiasm for new shale projects. In the third quarter, the drilling of oil and gas wells tumbled by 27.1% quarter over quarter annualized, which will weigh heavily on the nonresidential structures investment component of GDP.
Also, not surprisingly, the General Motors (GM) strike led to a 4.2% month-over-month decline in motor vehicle production, which, in turn, primarily drove down manufacturing. GM accounts for about 18% of the auto sector in the U.S., so any hiccup there is bound to show up in the overall production data. Just this week, a tentative agreement was reached between the United Auto Workers and GM to end the month-long strike (that had reportedly some 48,000 workers on strike). Once employees return to work, the loss in September production will be reversed.
Outside of the auto sector, the trend in manufacturing production is stabilizing, suggesting that the factors that are weighing on manufacturing activity--a strong dollar, tariffs, weakening global growth, troubles at Boeing, and an economywide desire to slow the pace of inventory-building--may have run their course. Manufacturing production excluding motor vehicles, a reliable gauge of underlying demand, increased in the third quarter (0.7% quarter over quarter annualized)--the first increase since fourth-quarter 2018--but remains 1% below its peak. This suggests that manufacturing activity is bottoming out but growth is likely to remain sluggish in the fourth quarter.
Early survey data of business managers (for October) from the New York and Philadelphia regions showed some strength in the details, even as headline numbers were only slightly positive. In the Empire State Manufacturing Survey, new orders held steady, and shipments and employment both rose. In the Philadelphia Fed Manufacturing Survey, orders were exceptionally strong in October, and there was an unusually large increase in unfilled orders--both positive for employment and shipments in the immediate future. In both surveys, current general business conditions have stabilized just above 0, and the forward-looking components discussed above point to improvement in the fourth quarter.
Manufacturers in the Philadelphia region marked up their expectations for demand and activity in the next six months--the orders, shipments, and average workweek indices all increased. The future capex index, a reliable predictor of real business fixed investment growth, jumped by 10.5 points to 36.4--maybe pointing to an unexpected year-end rebound for the manufacturing sector.
Groundbreakings Are Finally On An Upward Trajectory Despite The Headline Decline
For the first time since 2017, we will see residential investment become a positive contributor to growth. It will be adding to overall real GDP growth in the third quarter following six consecutive quarters of contraction. Increasing levels of permits (a forward-looking indicator of housing starts) suggest gains are likely in the fourth quarter as well.
Upward movement in the housing market is for real. Housing starts came in at 1.256 million units (annualized) in September, below expectations and August starts, but only after August was revised higher to 1.386 million. Single-family starts increased modestly to 918,000 annualized, and (volatile) multifamily starts declined by 133,000 to 338,000, more or less reversing their August increase. The South region has been driving the numbers in the past several months.
We like to look at the single-family starts trajectory since these pack more GDP punch per unit than multifamily starts. The three-month average for single-family starts is up very sharply, at 901,000, for the fifth straight increase. We expect further increases in single-family starts as younger households transition from renting to buying. Multifamily starts will continue to be choppy but should remain slightly below 400,000 on average.
Total permits dipped back to 1.387 million, reflecting a sharp fall in multiunits to 505,000. On the other hand, permits for single-family homes are just about keeping pace with starts, at 882,000 in September and the three-month average up 20,000 to 862,000 for a fourth straight increase. Both total and single-family permits climbed to levels last seen in the second quarter of 2007. This bodes well for fourth-quarter residential construction activity.
Homebuilders' sentiment is also solid and moving up. The National Association of Home Builders (NAHB) Housing Market Index increased by 3 points to 71 in October, the highest since February 2018, which bodes well for new home sales and further starts. The inventory of new homes for sale has declined to healthy levels after its surge late last year. This will incentivize builders to continue to break ground at a faster pace in the near term.
The plunging mortgage rate breathed life into the housing market in the third quarter and looks to build on that the rest of the year.
A Decline In Retail Sales Brings Down Consumer Spending Growth To A Sustainable Pace
Retail sales were weaker than expected in September. The 0.3% decline for overall sales followed 0.6% upwardly revised sales in August. Importantly, core retail sales (retail sales excluding autos, gasoline, and building materials), which feed into the GDP calculations, were flat in September following a 0.3% rise in August.
Non-store sales (including online purchases), which best reflect today's retail behavior, fell 0.3% in September--their first decline so far this year. But, the drop comes on the heels of strong growth in recent months. On a year-over-year basis, online sales were still up a little under 13%, compared with a 10% average in 2018.
The slowdown was in line with our view that the midyear pickup in real sales growth was somewhat unsustainable. Third-quarter growth in real consumer spending now looks to be around mid-2% over the quarter--a more sustainable pace compared with 4.6% in the second quarter.
Overall, consumer fundamentals are supportive of spending growth heading into the last three months of the year. The lower interest rate of the last few months has helped reduce household debt servicing cost, and household net worth is running near record highs. Job gains and increases in inflation-adjusted wages continue to help keep consumer sentiment near cyclical highs (the University of Michigan Consumer Sentiment Index rose in mid-October to 96).
|Review Of Economic Indicators Released In The Past Two Weeks (Oct. 7-18, 2019)|
|Latest period||Oct-19||Sep-19||Aug-19||Level year ago||% year-over-year|
|Jobless claims (four-week moving average)||10/19/2019||214,750|
|Consumer spending and confidence|
|Consumer Sentiment Index (University of Michigan)||October-preliminary||96||93.2||89.8||98.6|
|Business activity and sentiment|
|Industrial Production (% change)||September||(0.4)||0.8||5.4|
|Capacity utilization (level, rate)||September||77.5||77.9||79.3|
|Retail sales (% change)||September||(0.3)||0.6||4.1|
|Retail sales less auto (% change)||September||(0.1)||0.2||3.7|
|Business inventories (% change)||August||0.0||4.2|
|Wholesale trade, inventories (% change)||August||0.2||6.2|
|Philadelphia Fed General Business Conditions Index||October||5.6||12||16.8||19.7|
|Empire State General Business Conditions Index||October||4.0||2.0||4.8||20.0|
|Housing and construction|
|Housing permits (SAAR, mil. units)||September||1.387||1.425||1.288|
|Housing starts (SAAR, mil. units)||September||1.256||1.386||1.236|
|Housing completion (SAAR, mil. units)||September||1.139||1.262||1.150|
|Import prices (% change)||September||0.2||(0.2)||(1.6)|
|Export prices (% change)||September||(0.2)||(0.6)||(1.6)|
|PPI-final demand (% change)||September||(0.3)||0.1||1.4|
|CPI (% change)||September||0.0||0.1||1.7|
|Core CPI (% change)||September||0.1||0.3||2.4|
|Notes: Jobless claims are weekly data. Core CPI excludes food and energy. Sources: IHS Global Insight, U.S. Bureau of Labor Statistics, U.S. Bureau of Economic Analysis, and U.S. Census Bureau.|
|Economic Release Calendar|
|22-Oct||Existing home sales (mil.)||Sep||5.470||5.450||5.490|
|24-Oct||Durable goods orders (%)||Sep||(0.8)||(0.9)||0.2|
|New home sales (mil.)||Sep||0.699||0.700||0.713|
|25-Oct||University of Michigan Consumer Sentiment (final)||Oct||95.5||96.0||96.0|
|28-Oct||Advance trade in goods||Sep||(73)||(73.5)||(73.1)|
|ADP Employment Survey (000s)||Oct||120||124||135|
|GDP advance report (%)||Q3||2.1||1.7||2.0|
|Chain Price Index advance report (%)||Q3||2.1||2.2||2.4|
|31-Oct||Employment Cost Index (%)||Q3||0.7||0.7||0.6|
|Personal income (%)||Sep||0.2||0.3||0.4|
|Personal Consumption Expenditures (%)||Sep||0.3||0.3||0.1|
|1-Nov||Nonfarm payrolls (000s)||Oct||100||115||136|
|Private nonfarm payrolls (000s)||Oct||90||101||114|
|Manufacturing payrolls (000s)||Oct||(45)||(45)||(2)|
|Unemployment rate (%)||Oct||3.6||3.6||3.5|
|Average hourly earnings (%)||Oct||0.3||0.3||0.0|
|Construction spending (%)||Sep||0.4||0.3||0.1|
The views expressed here are the independent opinions of S&P Global's economics group, which is separate from, but provides forecasts and other input to, S&P Global Ratings' analysts. The economic views herein may be incorporated into S&P Global Ratings' credit ratings; however, credit ratings are determined and assigned by ratings committees, exercising analytical judgment in accordance with S&P Global Ratings' publicly available methodologies.
|U.S. Chief Economist:||Beth Ann Bovino, New York (1) 212-438-1652;|
|U.S. Senior Economist:||Satyam Panday, New York + 1 (212) 438 6009;|
|Research Contributor:||Arun Sudi, CRISIL Global Analytical Center, an S&P affiliate, Mumbai|
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