Commentary Directory

The Week Behind

A month into the fourth quarter, supply chain disruptions continue to make the headlines in economic news. In the face of it all, firms seemed to be holding up, just dealing with higher input prices. Throughout the summer, manufacturing was humming along with 0.5% MoM and 1.0% MoM gains in June and July before stalling at -0.1% MoM in August. Especially strong was business equipment production which surged 3.6% MoM in July as firms continued to pick up spending in response to surging consumer demand. Capacity utilization gained a vital 1.4% from April to August.

The latest release of the Federal Reserve's industrial production, however, shows that the effects of the disruptions are finally catching up to manufacturers. Production growth crashed -1.3% MoM weighed down by durables and more specifically, automotive products. The motor vehicle and parts industry fell a troubling -7.2% on the month with the persisting issue of the semiconductor shortage. Capacity utilization gave back its gains made since May with a -1.6% drop in mining capacity utilization. The sole bright spot came from a 0.4% MoM increase in business equipment which is up 8.1% YoY, the strongest market group.

The weakest market group, consumer goods (dropped -1.9% MoM in September and up just 1.4% YoY), is not one that you'd want to see struggling in the fourth quarter of the year with the holiday season primed to be a busy one. However, it appears that stores will have to navigate labor and goods shortages to meet consumer demand which is expected to be robust. The post-COVID problem of supply falling short of demand reflected in the latest industrial production release will be on full display. Outlooks are attempting to be optimistic but acknowledge uncertainty.

We start off with Wells Fargo's holiday season outlook which forecasts holiday sales to increase a record 11% YoY despite "inventory shortages" and "note enough salespeople in stores or delivery drivers for e-commerce platforms." However, the guess comes with "a degree of skepticism." In fact, Wells Fargo's projection of 11% YoY actually factors in a slight decrease in sales over November and December since flat growth in those months would actually lead to a 13% YoY gain. This or slightly worse results would not be unusual outcomes since most of the excess savings from government stimulus in Q1 has worn off and is unlikely to have an effect on holiday consumption. In summary, the year is likely to close out on a solid annual sales growth figure, but COVID and supply uncertainty create significant downside risk.

Deloitte's holiday sales survey echoes the concerns for an abnormal holiday season insisting that "a bounce back to pre-pandemic trends is not likely in the works." Average spend so far is up 5% YoY (just short of the 7-9% YoY expected in Deloitte's initial forecast) with a 15% YoY increase in spending on experiences, but this was mostly from gains in high-income groups as (65% planning not to spend are low-income). Retail executives expect the increase in sales to continue through the final two months of the quarter with 73% planning on shoppers to spend more or significantly more. However, they also acknowledge a tougher sales environment. Sixty-four percent are concerned about getting inventory in time, and 53% expect higher product prices. Like Wells Fargo, there seems to be a cautious optimism in Deloitte's survey with consumer resilience expected to be a reliable force.

One of the leading retail industry organizations, the National Retail Federation, also released some insights on 2021 holiday spending. Its survey sees consumers spending essentially the same amount as last year at $997.73 and slightly below the $1,047.83 in 2019. The expected shortfall is in non-gift purchases as spending on gifts and other holiday items near the 5-year average. Consumers know they are in for a tough shopping season (47% expect to have difficulty finding items), and as a result, this year is seeing the highest percentage of shoppers starting before November in the last 10 years. Again, the NRF's insights is one of stability with a nod towards supply weakness.

The theme in these outlooks is centered around a strong consumer being limited by tenuous business sentiment. Shoppers are actively trying to avoid disruptions from higher prices and shaky inventory sentiment by shopping early and online which is a good sign for holiday demand. Regardless, uncertainty from COVID and goods shortages pose downside risks. We maintain our position on cautious optimism and see solid sales growth from last year, near 2019-levels.

Chart of the Week

Holiday retail sales growth over November and December only has a loose correlation to consumer sentiment in those months in data going back to 1992. This suggests that US shoppers are very resilient during this period, and the low 71.4 reading in the mid-October UMich report is likely not going to be indicative of a drop in holiday spending.

The Week Ahead

The BoJ, BoC, and ECB all have monetary policy announcements that will provide insight into how inflation is affecting those central banks' outlooks. We will also get GDP announcements later this week from the US, the EU, and many individual European nations. These have become slightly less important during the pandemic period since high frequency activity indicators have tracked economic activity closely and quickly. Nevertheless, we look forward to more official figures.