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New Data Shows Slightly Brighter Picture for Economy

Morningstar's Bob Johnson says retails sales were better than expected, and industrial production may be truly bottoming out.

New Data Shows Slightly Brighter Picture for Economy

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Retail sales and industrial production numbers this week showed a slightly brighter picture for the economy. I'm here with Bob Johnson, our director of economic analysis, for his take.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: Let's start with retail sales. Time and time again you have talked about the importance of the consumer to the U.S. economy. And there are signs that they are really out there still spending.

Johnson: Absolutely. The numbers that came in this week were better than we expected, and there were some revisions to the past numbers too. So, it was a very satisfactory set of numbers. In fact, as we go through the last few months--and again, this is on a month-to-month basis, which isn't my favorite way to look at them, but--it shows that we've gone over the last three months, we've had an increase in all of them. We've gone from 0.1% to 0.5% to 0.6% in terms of month-to-month growth, and that's excluding the volatile gasoline sector and leaving out automobiles, which we can talk about separately. So, it's great to see that string of three months in a row.

Glaser: If we are seeing that acceleration month-to-month, year-over-year what's that look like?

Johnson: There it's more of the same, but at least now, we are back to our average over the last 12 or 13 months. We're back to about 3.9% year-over-year growth. So, we're clearly on a month-to-month basis, if you annualize those numbers, as I said earlier, we're running a little bit hotter than that right now. But the year-over-year when you roll all the months together is 3.9% which is exactly what the average over the last 13 months has been. And we bottomed out last month in the year-over-year data.

Now, with all of this data there is one caution that we have not seen the CPI, the Consumer Price Index, that comes out later this week and then we'll go back and adjust the retail sales numbers to take into account that there might have been inflation or deflation in some of the categories. One of the stronger categories was drugstores. It was up 0.8%. It was a big factor in the numbers. On the other hand, if that's all because of drug prices, that will turn in good news into bad news very quickly.

Glaser: If drugstores were a source of strength, what other sectors looked a little bit better?

Johnson: Yeah. Besides the drugstores nonstore retail, that is the Amazons of the world, the online stuff, did very well. They generally do well, but we had a few months where they were a little soft. This month they really bounced back nicely. Grocery stores are doing well. Again, that's usually a pretty tiny growth category, but they are actually growing a little bit now. As prices have come, in a lot, especially on meats and people are shopping more at stores, and that's been great news for the grocery stores. On the other hand, it's hurt restaurant sales a little bit, is that gap between what it costs to eat out and what it costs to eat home really has kind of widened out a lot, especially as meat prices have fallen so dramatically. So, one of the weaker categories was restaurant sales, and we usually we view that as a pretty big negative. That's a great indicator of short-term consumer confidence. But this time it's just may be a reflection of grocery store prices being so darn attractive, and we kind of saw it in this month's set of numbers. And besides drugs, I think electronics did OK as well.

Glaser: If restaurants are weak, anything else on the negative side of the ledger?

Johnson: Well, I think that that was the main one that really did poorly that jumped off the page at us.

Glaser: So, your analysis excludes autos, but let's talk about it a little bit. This is a sector that there has been some concern about a slowdown. What are you seeing there?

Johnson: Last month, individual numbers, especially when you did all the government seasonal adjustments, turned out to be better than most people had hoped. But in any case, on a year-over-year basis, auto sales are kind of flat to maybe down a little bit, whether you look at the month of October or if you look for the full 10 months that we've seen already. So, autos are clearly slowing and that's certainly going to have an impact on some of the consumption numbers. And on top of that we're already seeing some of the manufacturers, the auto manufacturers saying, you know, we're shutting this plant down for a month or this one for a week or adjusting this one here. So, manufacturers are adjusting their schedules a little bit and that's a first time they have been adjusting at least on the downside for quite some time. And that's certainly won't be good news for some of the employment and manufacturing numbers in the months ahead.

Glaser: This does lead us to into talking about manufacturing and industrial production. We've talked maybe a few times that we think maybe this is bottoming out. Do you think there was a sign that industrial production is not getting any worse now?

Johnson: I think so. And in reality, I mean, we've said for a while that it's bottoming, but it just never seems to get any better. It just always seems to be right on that bottom. And that's really been true for quite a while for maybe a couple of years. Well, now, with the data and what we've seen in the revisions and a good performance, known performance the last couple of months, manufacturing is actually--and again, on a month-to-month basis--has been up for the last five months.

We've got this case where a lot of data now, the sequential data, is finally acting a little bit better. We've seen it for a few months in a row. On the other hand, the year-over-year data is kind of still saying we are down about 0.1% year-over-year. But we haven't been any better or worse than that. So, we're kind of just stumbling, as I say, stumbling along the bottom. And with so many of these indicators now we're kind of stuck with this situation where depending on which time frame you view the data from you get exactly opposite conclusions. So, I think, we're going to have to be really careful about the data. But I think everything here certainly indicates that the run-up to the election--now, remember, all of this goes through the end of October when they still thought Hillary was going to win, but the run-up to all of this seemed to be saying that everybody was relatively happy and things were getting slightly better in a great many categories, at least on a month-to-month basis.

Glaser: Rolling all of this up, what could this mean for fourth-quarter growth?

Johnson: I think that fourth-quarter growth--again, GDP now is a source that we look to once in a while and it's run by the Atlanta Fed and it's a very mechanical process. It takes all the data that we've seen so far in the quarter, which is mainly November data so far, or October data reported in November, and then they kind of do some trend mining and they get a forecast for the whole quarter.

And again, it kind of takes a politics points of view out of it and they are thinking about 3.3% growth for the fourth quarter. So, that would be a pretty good number. But keep in mind that our forecast is about 3.2%, but that's still for the full year, that is the full 12 months or the full 12 months only gets us to about 1.6% growth. So, don't get too excited about this because we started the year so weak, we would expect this back half to be stronger, and it appears to be from the GDP now data. I happen to think the ultimate number may come out just a little lower than what they are thinking. But certainly, they are way above consensus estimates as am I.

Glaser: But if we consumers being a little bit more confident and some signs of growth picking up, does this mean that the Fed could very well act in December even though maybe right after the election it seemed like there was a chance that they would hold back?

Johnson: Absolutely. I mean, I think, again, now we are back to watching employment reports and we will have one more before that, and we'll have to see how that one turns out. But I think we're kind of back to how that one is going to be, if that one swings one way strongly--one way or another, may affect the data. We had thought maybe the Fed would take the interest rate off the table just because the markets would have been off along with the surprise Trump election, but it seems like the market has taken that a bit more in stride than I had expected. So, certainly, that kind of reason staying low to reassure everybody about the markets probably certainly won't be necessary.

And certainly, retail sales, I've said again and again, that's probably the key thing to watch and the numbers that we have right here in front of us today look better than I would have expected a month ago, and that may cause some to think about raising the numbers. And certainly, people are worried about Trump and stimulus and gasoline prices haven't fallen as much as some people thought they might. All of those kind of point to more inflation. So, if you roll that together, maybe they will act. But again, it's all going to kind of come down to this employment report and the inflation numbers that we are going to get later in the week, in my mind, will be the key drivers of what they are going to do in December.

Glaser: Bob, thanks for your analysis today.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.

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