September 12, 2003

Lower-Than-Expected Retail Sales

A piece of not-so-good demand news, from John Labate of the Financial Times: Home US: Expectations of a strong rebound in the US economy were called into question on Friday with disappointing reports on retail sales and consumer attitudes. US retail sales rose in August, but more slowly than expected. Sales by retailers reached $319.2bn (euro 290bn, £200bn), a rise of 0.6 per cent from the previous month and 5.4 per cent from August 2002, according to the US Commerce Department. The top-line sales figure, however, was only about half of what economists had been expecting.

The second surprise came with a report suggesting that consumer sentiment had edged lower in early September from August levels. The consumer sentiment index compiled by the University of Michigan fell in its preliminary September reading to 88.2, down from the final reading for August of 89.3. Economists had expected September to be above 90. The Michigan report's measure of current views on the economy and future expectations also dropped from August levels....

Analysts said the dip in consumer sentiment reflected concerns about the sluggish employment sector. Economists asked how strong consumer spending might remain in the months ahead, if the employment sector remained sluggish. Monthly payrolls were reported to be down 93,000 in August - far worse than expected - while weekly jobless claims unexpectedly rose...

Posted by DeLong at September 12, 2003 09:08 PM | TrackBack



A completely candid, and maybe rididulous question, I have been asking myself, is how much of this "upturn" (production speaking) is to be attributed to military spending (just thinking that goverment spending in Europe never quite helped with unemployment e.g.)

I mean, adding things up, 87 billions here, 87 billions there, and soon we're not talking anymore about small numbers, are we? (actually not a rhetorical question). It must be that production in sectors that supply for the war effort is up. Candidely, and mostly google-lazily, may I ask how much of domestic product we're talking about percentagewise?

I realize that is may not be this explanation behind the job-shedding recovery, but it may explain other important things though.


Posted by: Jean-Philippe Stijns on September 12, 2003 10:50 PM

About half of the GDP increase in Q2 was attributable to military spending.

The continuing question is whether this recovery is self sustaining or not.

In Q1 2003, the SPX benefited from the dramatic one-time gains from the energy sector. A whopping 180% earning’s growth was tied to the short lived, war-caused spike in the price of crude. Energy revenue grew 46%, versus expectations of 12% gains for Q2 ‘03.

In the Q2, there was not only Military spending, but the suddenly weak dollar. Manufacturing and Cyclical firms were reaping the benefits of the weak US currency. Advantageous exchange rates helped companies "beat their numbers" (ie, CAT, UTX, DOW, and DD).
Note that the dollar has since strengthened.

In Q3, we continue to see top line revenue growth as stagnant, while profits are managed thru continued cost cutting and layoffs.

We have yet to see this economy enter into a virtous cycle of increased hiring and capex spending. Instead, this has been a stimulus driven market event -- not an broader economy wide recovery . . .

I beleive that unless we see significant new hires in the US by Q2 2004, this recovery falters and we run the risk of slipping back into recession.

Posted by: Barry Ritholtz on September 13, 2003 04:18 AM

>> the sluggish employment sector

Is this as opposed to the sector of people working for free, and the other sector of people goofing off while pretending to work?

Or is there some meaning to this phrase that I am missing?

Posted by: Amos Newcombe on September 13, 2003 05:02 AM

Consumer confidence is bound to erode quickly as
job losses keep mounting. Lets do the math.
50-90,000 jobs eliminated last month. normally 200,000 jobs are created a month with any positive GDP numbers. Each person that loses a job is not an ABSTRACTION to the people in their churches
and clubs. There is an ENORMOUS multiplier of job loss in the erosion of consumer confidence.
It takes a job with cash flow to buy even the CHEAPEST things made in China

Posted by: greg on September 13, 2003 06:16 AM

Epinet broke out the GDP growth components of last quarter. The contribution of military spending was almost a third. So 3.3% growth might have been 2.1% were there no military spending.

There is going to be some slowing of military spending this quarter. July consumer sales were reasonably strong, but there was a slowing in August. Employment was a problem in July and more so in August. September employment numbers began quite poorly. Wage increases have been pressured. Middle class families are pressured by selectively rising prices for critical products from health care to tuition. Combined private and public saving has been falling alarmingly. Where are consumers going to find the funds for continued strong increase in spending? There is not enough global growth to expect much of an American export surge.

Wall Street Economists have been claiming GDP growth will be 5 to 6 to 7% for some time to come. Do I ever hope so, but I do not see why?

Posted by: anne on September 13, 2003 07:26 AM

Wall Street economists as a group are a contrary indicator Anne.

"A piece of not-so-good demand news, from John Labate of the Financial Times: "

Why not just call it bad demand news? And where is the "good" demand news. About the best we get these days is mediocre.

I'm damned if I know where people think demand is going to come from when the economy continues to shed jobs; when the government is providing stimulus in practically the least efficient way possible; when fixed costs for individuals are generally risin; when the US has significant overcapacity; and, when productivity is rising so fast that employers have no need to hire workers.

I further don't know why anyone wouldn't think that we aren't in a secondary bubble in the stockmarket (still wildly overvalued in historical terms) and a bubble in the housing market. And when those two bubbles burst and we still haven't had a "recovery" with job gains what do you think is going to happen to demand?

I could be wrong on all this, but I really, really doubt it. I hope I am though.

Posted by: Ian Welsh on September 13, 2003 08:58 AM

Ian Welsh

The NYTimes has an article today about the American economy "roaring" ahead, but I have no idea what roaring might mean. Growth since the recession ended in November 2001 has been considerably below growth coming out of any other recession since 1945. The latest economic numbers before the weak sales report and continued sharp job looses struck me as moderate and below what would still be hoped for coming out of a recession. Now, I question whether the growth improvement can continue. Remember, the tax credit checks have been sent and I agree that the tax cut once again will give us far too little growth for the deficit damage.

Stock values bother me as well. The price earning ratio for the S&P was 28.6 on August 29. Who can tell just what is a too high, but this p/e level is high and calls for planning on moderate returns. What are we going to do about generating enough savings for decent retirements?

Posted by: anne on September 13, 2003 10:32 AM

there was a piece in "Fortune", which alleged that reported profits, to shareholders were higher than to the treasury.

Posted by: big al on September 13, 2003 10:33 AM

By the way, I have no current idea what price earning ratios would be were we to expense options for S&P technology companies. Intel? Cisco? Applied Materials?

Posted by: anne on September 13, 2003 10:42 AM


Check out this link to Standard and Poors web site. They track the earnings for the index in various forms including their core earnings measure. On the bottom of the spreadsheet are some tabs, one of which shows how the core earnings are arrived at and so breaks out the options expense.

If I read it correctly, they estimate the Current Price to Full Year 2003 Core Earnings at 25.6 .

Posted by: snsterling on September 13, 2003 02:53 PM

Don't forget to subtract 20% from reported earnings to cover the $400 billion the Fortune 500
owes its defined benefit pension plans!!!!!!!!

Posted by: greg on September 13, 2003 04:34 PM

Nah. The feds are going to bail them out by letting them change them to defined contribution plans. That's my bet, anyway.

Posted by: Ian Welsh on September 13, 2003 07:17 PM

A 90% confidence interval for the August change in retail sales was -0.3% to +1.5%. You don't want to take the headline figure (or any one piece of economic data) as definitive. Ex-vehicles, sales rose 0.7% -- up 6.0% from a year ago. The retail auto dealership sales don't matter, since automakers already reported an increase in unit sales figures (which the BEA uses in the consumer spending / GDP calculation). The remaining details of the retail sales report were strong.
Monthly changes of two or three points in consumer sentiment are meaningless -- consumer spending depends on income, wealth, and the ability to borrow. Attitude measures add nothing. Furthermore, the UM index does not directly reflect labor market perceptions (a contrast to the Conference Board's consumer confidence index), but has a greater weighting on personal finances.
The analysis of high-frequency economic data reports by the press, and by some academics, is generally bad. Data tend to by noisy. You needn't react to every blip. It makes me want to bang my head against a wall.

Posted by: scott brown on September 14, 2003 04:04 PM
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