Durable Goods Retail Sales Suffer from High Interest Rates and Wary Consumers
Economic news and commentary for April 14, 2023
US Retail Sales
Consumer activity continued to be weak in March as a result of a decline in durable goods sales. US retail sales fell -1.0% MoM in March after a -0.2% MoM decline in February. On an annual basis, sales were only up 2.9% YoY. The decline was heavily impacted by contractions in both vehicle and gas station sales. Ex-motor vehicle and gas sales were down at a softer rate of -0.3% MoM and had an improved year-over-year gain of 6.0% YoY. The dismal results were impacted by fewer purchases of big-ticket items like electronics (sales down-2.1% MoM), furniture (sales down -1.2% MoM), and building materials (sales down -2.1% MoM). Each of these categories is now down on a year-over-year basis, including a sharp -10.3% YoY decline in electronics sales (the lowest since 2009 when excluding the pandemic period). Higher interest rates are clearly impacting consumers’ confidence in purchasing expensive items and limiting the ability to easily access or afford credit.
If there were sharp declines in these categories, then where were the gains? The main source of growth came from the sales of nonstore retailers which increased 1.9% MoM in March and are up 12.3% YoY. The increase in this segment represents a jump of over $2 billion in sales which offsets the declines in furniture, electronics, and building materials on the month. Additionally, there was an improvement, albeit slight, in other non-durable and services segments including sporting goods & hobby sales (up 0.2% MoM), health & personal sales (0.3% MoM), and food & drinking services (0.1% MoM). These might include more of your day-to-day purchases that don’t take a chunk out of finances when purchased and, most likely, consumers would not need to access credit when shopping for items in these segments.
Durable goods purchases tend to take the lead in indicating where the economy is going. Purchases for these types of goods are the first to decline when a recession is on the horizon as consumers start to consider their finances more and tighten their purse strings. This is especially true if they don’t have access to easy credit. Interest rates on credit card plans at commercial banks are up to 20.1% as of February 2023, just before the pandemic, this averaged around 15%. We should be set for more declines in sales going forward as rates will probably stay high for the rest of the year, and savings and checkings accounts are still recovering from inflation.
Still to come…
9:15 am (EST) - US Industrial Production
10:00 am - US Business Inventories
10:00 am - US Consumer Sentiment
9:30 pm - China House Price Index
Morning Reading List
Other Data Releases Today
India's Wholesale Price Index was up 3.9% YoY in February, down from 4.7% YoY in January and 5.0% YoY in December. Non-food wholesale commodity prices fell -1.7% MoM and were up just 0.1% YoY. This compares to 24.2% YoY a year ago.
French CPI growth was revised up from 5.6% YoY to 5.7% YoY in March. The monthly gain was 0.9% MoM. The slight upgrade was due to an upward revision to food from 15.8% YoY to 15.9% YoY. Core inflation was 6.2% YoY in March, up from 6.1% YoY in February.
German wholesale prices edged up 0.2% MoM and were up just 2.0% YoY in March, down significantly from 8.9% YoY in February. The initial inflationary impulse appears to be over in the German wholesale sector.
US import prices fell -0.6% MoM and -4.6% YoY, export prices fell -0.3% MoM and -4.8% YoY. Fuel imports fell -27.0 YoY (-2.9% MoM), and nonfuel imports fell -1.5% YoY (-0.5% MoM). Agricultural exports fell -2.3% YoY (-1.5% MoM), and non-agricultural exports fell -5.2% YoY (-0.2% MoM).
US
Dollars and Sense: The Fed’s Drive to Survive (TD Bank) - Similar to a Formula One driver, central banks need to find the right balance of speed, control, and strategy to cross the finish line without rolling over the economy. A strong tailwind from inflation and employment has kept the Fed biased towards tightening monetary policy, but leading indicators are starting to point to some obstacles on the road.
Intermittent Storms (Northern Trust) - Just a month ago, we were in the grips of a panicked interval for the financial sector. Would the challenges of Silicon Valley Bank (SVB) spill over to other banks, grow into a systemic shock, and spur the next recession? Today, circumstances are far calmer, but the incident has cast a shadow over the outlook. SVB demonstrated that stress can manifest quickly, and some of its challenges are shared by most financial institutions.
The Producer Price Index (PPI) Declined 0.5% in March (First Trust Portfolios) - Producer prices in March declined by the most for any month since the shutdown-induced price plummets of early 2020, a potential sign that the drop in the M2 measure of the money supply since last year is starting to have a greater impact on the economy.
How Did New York City’s Economy Weather the Pandemic? (Liberty Street Economics, NY Fed) - When COVID-19 first struck the U.S. in early 2020, New York City was the epicenter of the pandemic. By early April, there was an unthinkable scale of suffering, with massive hospitalizations and roughly 800 fatalities per day, accounting for nearly half of the nationwide total. The rapid spread was facilitated by the city’s extraordinarily high population density and widespread use of mass transit. What followed was a quick and massive shutdown of restaurants, retail stores, personal services, offices, and more. And the shutdowns, of course, led to widespread job losses.
The Tri-State Region’s Recovery from the Pandemic Recession Three Years On (Liberty Street Economics, NY Fed) - The tri-state region’s economy was hit especially hard by the pandemic, but three years on, is close to recovering the jobs that were lost. Indeed, employment initially fell by 20 percent in New York City as the pandemic took hold, a significantly sharper decline than for the nation as a whole, and the rest of the region experienced similar declines, creating a much larger hole than in other parts of the country.
Mixed emotions (EY Parthenon) - The Federal Open Market Committee (FOMC) minutes revealed Fed policymakers’ mixed emotions amidst a concerning banking stress episode. Stronger data on inflation, employment and economic activity had convinced excessively data-dependent Fed officials of the need to tighten monetary policy faster and raise rates higher than previously expected. However, banking sector developments and broad-based economic and financial market uncertainty led to a more prudent and dovish reassessment of the near-term policy trajectory.
Child Care: Critical to the Economy but Difficult to Access and Afford (St Louis Fed) - Child care is critical to the nation’s workforce. Yet access to high-quality care is inequitable, and the cost, especially for licensed child care, is steep for many families. Additionally, many parents simply cannot find child care that meets their needs, limiting their ability to work. When the child care sector does not fully meet the demand for care, it limits parents’ ability to work, which in turn affects the broader economy.
UK
GDP flatlines in February, but private sector activity revives - albeit with uncertain outlook (S&P Global) - The UK economy stagnated in February but once allowance is made for public sector strikes, the official data add to survey evidence to suggest that private sector economic activity has revived so far this year after a difficult end to 2022. However, the official data also corroborate some of the concerns flagged by the PMI data, which suggests that growth could falter again in the coming months.
Asia
Asia Likely to See Dynamic Economic Growth, but With Policy Challenges (IMF) - Asia and the Pacific remains a dynamic region despite the somber backdrop of what looks to be shaping up as a challenging year for the world economy.
Latin America
In Latin America, Fiscal Policy Can Lighten the Burden of Central Banks (IMF) - Growth in Latin America is projected to slow to 1.6 percent this year after a remarkable 4 percent in 2022. Price pressures that accompanied last year’s brisk economic activity appear to have peaked, but underlying inflation remains stubbornly high, disproportionally hurting low-income households who spend most of their earnings on food. To mitigate the risk that inflation becomes entrenched, fiscal policy can help monetary policy in reducing demand pressures.
Inflation
Global Inflation Watch - Core inflation pressures remain elevated (Danske Bank) - Inflation drivers continue to paint a mixed picture, but inflation is likely to head lower through 2023 in the US and euro area. Price pressures from food, freight and energy have clearly eased. Labour markets remain tight, but wage pressures have showed tentative signs of easing.
European food inflation – hungry for profits? (Allianz) - Food prices in Europe remain high and will only decline later this year. In March, headline inflation in the Eurozone declined to 6.9% y/y (down from 8.5% y/y in February) due to a large drop in energy inflation to -0.9% (down from 13.7% y/y in February) as we mark the one-year anniversary of the jump in oil and gas prices after Russia invaded Ukraine. However, food, alcohol and tobacco inflation rose again to 15.4% and are likely to remain high until the end of the year.
Building Materials Prices Climb as Concrete, Transformer Shortages Persist (NAHB) - According to the latest Producer Price Index report, the prices of inputs to residential construction less energy (i.e., building materials) climbed 0.3% in March 2023 (not seasonally adjusted). Since declining the last four months of 2022, the index has increased three consecutive months by a total of 1.6% but has been relatively stable over the past year.
Rates
Rates Scenario for April 13, 2023 (BMO) - BMO gives its forecast for various rates in the US, Canada, and abroad.
FX
US dollar gives up its throne (CIBC) - The USD decline that started with the spread of banking sector turmoil is set to extend as investor attention turns to other advanced economies that aren't as far along in tightening cycles, with the Fed closer to terminal.
Real Estate
Remodeling Market Sentiment Edged Up in First Quarter of 2023 (NAHB) - While remodelers are generally more optimistic than their single-family builder counterparts, some are noting negative effects within the market including continued material shortages and higher interest rates.
Markets
Equity outlook, sticky inflation, and banks earnings preview (Saxo Bank) - The expected real rate return for equities looks more attractive than that offered in global bonds and as such investors should still be allocating to equities. The underlying momentum in the economy and cash flows from companies suggest at this point that it is only a recession that can derail the equity market. In today's equity update we also reflect on yesterday's US inflation report and how the fragmentation game and labour shortage will continue to underpin inflation dynamics.
OPEC sees tighter market (ING) - Oil prices still came under pressure yesterday despite OPEC numbers suggesting a tighter market for the remainder of the year. Today, all attention will be on the IEA’s monthly oil market report.
Outlook
EM Sovereigns: IMF remains cautious on World Economic Outlook (ING) - Amid a downgrade to the IMF’s global growth forecast, EM sovereigns should remain resilient with areas of relative growth outperformance, easing pressure on commodity importers and fiscal reform momentum. However, rising debt servicing costs and refinancing risks leave the potential for more debt distress among weaker issuers.
Geopolitics
Geopolitical radar - Our new monthly briefing keeps you up to date on key geopolitical developments (Danske Bank) - Geopolitical developments are increasingly important for economic as well as business decisions. We are at a time of significant changes in the global order and it is not clear exactly where we are heading. In order to keep track on geopolitical developments and offer our views on future scenarios, we today publish the first edition of our new publication 'Geopolitical radar'.
Green
Making the electric car revolution work (DWS Group) - Charging points for electric vehicles are emerging as an increasingly interesting segment infrastructure investors should keep an eye on.
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