The Growing Signs of a Gradual Slowdown in Consumer Spending is Troubling

By | October 21, 2019

Welcome to FTR’s “Monday Morning Coffee “ blog. The following article is designed to keep busy executives up to date with the latest economic data releases. Released every Monday, this blog promises to keep our clientele updated with the latest weekly economic news and developments, highlighting its impact on the transportation, freight, and equipment markets. Hopefully, this will be an informative addition to the fine body of work associated with FTR.


Coffee and Economic Review

World shares slipped after China posted its weakest growth in nearly three decades, leaving traders hoping that the swift stimulus Beijing and other central banks have provided in recent weeks will fend off a more serious downturn. China’s economy expanded just 6.0% y/y in the third quarter, slower than the 6.2% increase in the second quarter. The Dow lost 255.68 points on Friday, or 0.95% to 26,770.2, while the S&P lost 11.75, or 0.39% to 2,986.2. For the week, the Dow was up 23.9 points, or 0.14%, while the S&P added 8.26, or 0.39%. Stocks were initially buoyed after the UK and the EU reached an agreement on Brexit. However, the agreement must go through a debate and a vote by the UK parliament on Saturday.

Personal consumption, which comprises roughly 70% of overall GDP, has proved resilient under the cloud of trade uncertainty. However, retail sales fell 0.3% in September for the first time in seven months. Auto sales were the main drag but the flat reading for control group sales versus the consensus expectation of a 0.3% increase, may be one of the fist concrete signs of a crack in the consumer armor. Leading indicators of consumer spending have been pointing to a slowdown in consumer spending. The Conference Board and the University of Michigan’s indexes have stalled out and we may be starting to see it in hard data. Still, PCE is on track for a solid 3.4% rise in Q3, but the deterioration in fundamentals may pull growth under 2% in Q4.

The manufacturing sector weakened much sooner and is showing little signs of picking up anytime soon. Overall, industrial production fell 0.4% in September and manufacturing declined 0.5%. The GM strike was behind the 4.2% drop in auto production, but non-auto output is also weak. October will see continued weakness in manufacturing even though GM and the UAW now have a tentative agreement. The biggest threat to the factory sector is not Detroit but Washington. Markets bounced on the announcement of “phase one” of a trade agreement between China and the United States. The details, however, remain highly vague and we suspect no progress will be made until the Asia-Pacific Economic Cooperation (APEC) in Chile in mid-November, if not even later.

The growing signs of a gradual slowdown in consumer spending is troubling, as the consumer is the only offset to the weakness in manufacturing and business investment. Housing does appear to be slightly positive. Although housing starts fell in September, the reason was weakness in the volatile multifamily sector. Single-family starts have been positive for four consecutive months. Still, housing comprises only about 4% of the economy and its capacity to lift GDP growth is limited. This suggests the Federal Reserve will move again in October to cut rates. Even if the consumer has a merry Christmas shopping season, there is danger that consumption may weaken substantially starting the new year. If so, the various forward-looking economic indicators that are flashing red and point to a slowdown, or even a recession, may be correct.

Next week, we gat a look at new and existing home sales and durable goods orders.

Latest Data

The U.S. Economy:

Retail sales disappointed in September, falling 0.3%, after a 0.6% surge in August. Declines were widespread. Sales excluding autos fell 0.1% and excluding autos and gasoline were unchanged. Sales were 4.1% above year earlier levels, down from August’s 4.4% rate. There were several unique issues in September including Hurricane Dorian, seemingly weak sales of the new I-Phone and the GM strike, all of which might hurt sales but the exact impact is hard to estimate. Sales were broadly weak, with many segments posting losses. The biggest losses were department stores, building supply stores and vehicle dealers. Growth at non-store retailers fell 0.3% in September but was up 12.9% from a year earlier. As a trend, sales have been strong, so a one-month loss is not pessimistic. Consumers are seeing slowing, but still positive job growth. Wage growth has braked, but still is a positive driver. Stocks have not moved much in 18 months. House price appreciation has slowed. Still, the consumer is still in the driver’s seat for the economy. If consumer confidence were to wane, however, the economy could find itself in real trouble.

Inventory build took a breather in August, rising only .02%, following a 0.3% increase in July. Retail inventories fell .05%, wholesale stocks fell .13% and manufacturing stocks fell .05%. August’s business sales matched July’s meager 0.2% increase. The inventory-to-sales ratio held firm at 1.40. Inventory declines were widespread among retail categories. Autos and parts inventories fell 0.1% over the moth but retailers excluding autos fell 0.2%. Retailers were in poor shape due to Trump’s trade war with China. As the administration targeted consumer goods for tariffs, many retailers responded by stockpiling products ahead of duties. Tariffs have also cut into profits for retailers. An inventory correction is likely underway and much needed. Bloated inventories are a major reason the manufacturing sector is in recession.

Housing starts slowed in September, falling 9.4% to an annual pace of 1.256 million. Single-family starts increased 0.3% to 918,000, while the multi-family sector fell 28.2% to 338,000. Permits also declined in September, declining 2,7% from August to an annual pace of 1.387 million units. Again, it was the multifamily sector that led the monthly retreat, falling 8.2% to 505,000, while the single-family sector saw permits rise 0.8% to 882,000. The sharp decline in mortgage rates is helping the housing industry as starts are slightly above year earlier levels. Permit declines suggest a lower activity over the next few months. Housing is in a weaker position in September than it was in August.

Industrial production fell 0.4% in September, its seco0nd decline in three months. The increase for August was revised up to a 0.8% increase. Mining led the top-line decline, falling 1.3%. Warm weather caused utility output to rise 1.4%. Manufacturing fell 0.5%, following a 0.6% increase in August. Motor vehicle and parts production slumped 4.2$ in September, following a 0.9% decline I August. The decrease was largely driven by the strike by the UAW at GM. Production in non-auto manufacturing decreased 0.2% and was 0.5% lower than a year earlier. Recent weakness in manufacturing is reflecting an inventory adjustment, slower global growth, uncertainty over trade policy and the past effects of the strong dollar. The partial trade deal did delay tariffs due to be implemented on Oct. 15. However, the tariffs on the remaining $156 billion of Chinese gods is still scheduled for Dec. 15. The outlook for the industrial sector is pessimistic for a few quarters. The global economy continues to weaken and trade volumes are far from turning the corner.


The U.S.-China trade war will cut 2019 GDP growth to its slowest pace since the 2008-09 financial crisis, the International monetary Fund warned recently, adding that the outlook could darken considerably of trade tensions are unresolved. The IMF projects that 2019 GDP growth will be 3.0%, down from the 3.2% July forecast, largely caused by increasing fall out from global trade friction. The World Economic Outlook report spells out in sharp detail the economic difficulties caused by the U.S.-China trade tariffs, including direct costs, market turmoil, reduced investment and lower productivity growth due to supply chain disruptions. The global crisis lender said that by 2020, aouced tariffs would reduce economic output by 0.8%, which translates into a loss of $700 billion, or the equivalent of an economy the size of Switzerland disappearing. “The weakness in growth is driven by a sharp deceleration for manufacturing activity and global trade, with higher tariffs and policy uncertainty damaging investment and demand for capital goods,” IMF Chief Economist Gita Gopinath said in a statement. Services were still strong across much of the world, but there of some signs of softening of services in Europe and in the United States, Gopinath said.

China’s economic growth slowed more than expected in almost three decades as the U.S. trade war hit factory production. GDP growth rose just 6.0% in the third quarter, slower than the second quarter 6.2% growth rate. Downbeat Chinese data in recent months has highlighted weaker demand at home and abroad. Analysts say the capacity for stimulus is limited in an economy saddled with piles of debt following previous easing cycles, which sent housing prices sharply higher. Recent signs of a breakthrough in the protracted trade war is unlikely to change the economic outlook anytime soon. In contrast to the weak GDP report, China’s industrial production grew at a better than expected 5.8% in September, faster than the 5.0% 17-year low posted in August. Demand was in line with stronger domestic orders in food processing, textiles and electrical machinery. Growth in cement, crude steel and cars slowed further. Retail sales rose 7.8% in September, faster than the 7.5% rate in August.

Important Data Releases This Week

September retail sales will be released on Wednesday, October 16 at 8:30 AM EDT.  After posting a soft August except for auto sales, we are looking for a 0.3% in sales for September. Sales excluding autos and gasoline are also projected to rise 0.3%.

September existing home sales will be released on Tuesday, October 22 at 10:00 AM EDT. At an annual pace of 5.490 million, existing home sales extended recent gains in August, posting a 2.6% increase for a two-year high. Continued improvement is not expected for September, falling to a projected 5.450 million.

September durable goods orders will be released on Thursday, October 24 at 8:30 AM EDT. Durable goods orders are expected to fall 0.7% in September after the 0.2% increase for August. Excluding transportation and the core capital goods orders are projected to fall 0.1% in September.

September new home sales will be released on Thursday, October 24 at 10:00 AM EDT. New home sales pivoted higher beginning in June and extended to August. The outlook for September is 699,000, down from August’s 713,000 total.

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About Steve Graham

Steve is one of the premier analysts in the transportation equipment industry. On a monthly basis Steve tracks and analyzes in detail the trailer and heavy-duty truck industry. Aside from following these two sectors he is also instrumental in helping our customers analyze the economy and its impact on transportation and transportation equipment.