Weakness beneath the headlines is the story behind this morning's U.S. economic reports and the reason why the dollar is not responding to the pick up in consumer spending. Retail sales increased 1.4 percent in the month of October, but excluding autos, sales grew by only 0.2 percent, half the pace of the previous month. Car purchases single handedly drove up spending. Even though Americans ate out more and bought clothing and general merchandise, the increase in discretionary spending was modest. Instead, we saw a large drop in spending on building materials, electronics, sporting goods and furniture. The September data was also revised down materially (from -1.5 to -2.3 percent for advance retail sales) and discounts the optimism in the headline release.
The good thing is that spending is increasing and not decreasing but besides that, the guts of the report are weak. The stronger results reported by individual clothing retailers earlier this month appears to be reflected in the headline release, but the details suggest the sector as a whole is still suffering. Looking ahead the big question is whether consumers will deliver during the last 2 months of the year. Retailers started to promote holiday shopping before Halloween and every year they seem to be sending out their holiday brochures earlier and earlier. If it was up to retailers, we would be celebrating Christmas in the beginning of November. Given the sentiment in America and the forecasts by retailers, we do not believe that consumers will come through over the next 6 weeks.
The Empire State Manufacturing Survey also fell short of expectations with the index falling from its 5 year high of 34.57 to 23.51. As one of the first manufacturing sector releases for November, it certainly paints an ugly picture. However unlike the retail sales report, the underlying components of the manufacturing sector survey provide some relief. Half of the components are still in positive territory and most importantly, the outlook component increased from 55.69 to 57 which means that manufacturers in the NY region believe that business conditions will still improve 6 months from now.
The outcome retail sales report and the Empire State Manufacturing Survey weigh on the dollar today, but keep an eye out of Fed Chairman Ben Bernanke's speech which could trigger additional volatility in the U.S. dollar.
Comments