Michigan Consumer Sentiment Recovered Slightly

The mid-December reading of consumer sentiment from the University of Michigan recovered slightly from the the dismal November level. At 59.1 the figure was up 6.9% from November and it was the highest level since September. It still was down, however, by nearly one quarter from last year. The reading for December beat Consensus expectations for 55.0.

During the last ten years there has been a 55% correlation between the level of sentiment and the three-month change in real consumer spending.

Weak prices most likely pushed up the index of buying conditions for large household goods by one-third from November. The view of current personal finances improved slightly from November's record low level, and the figure remained off by nearly one half from last year's average.

The expectations component of consumer sentiment continued to fall. A 2.8% m/m decline returned the series to nearly its lowest since 1990 and close to the low of 1980. Expectations for business conditions during the next year did drop to the lowest since 1980 and expectations for conditions during the next five years fell as well. The expected change in personal finances improved slightly for the second consecutive month.

The opinion of government policy, which apparently influences economic expectations, ticked up slightly for the second month (-29.7% y/y). A higher 42% thought that a fair job was being done but a lesser 4% thought that a good job was being done. That was nearly the lowest percentage on record.

Recent economic weakness and lower oil prices caused inflation expectations to fall. The mean expected rate of inflation during the next year fell further to 1.9%. It was as high as 7.0% in May. The expected inflation rate during the next five years fell to 2.7%, a record low for the series which dates back to 1980.

The University of Michigan survey is not seasonally adjusted.The reading is based on telephone interviews with about 500 households at month-end; the mid-month results are based on about 300 interviews. The summary indexes are in Haver's USECON database, with details in the proprietary UMSCA database.

October business inventories dropped 0.6% from September. That month, in turn, was revised from a 0.2% decline to 0.4%. Total business sales -- manufacturers, wholesalers and retailers -- dropped a whopping 3.5% in October, following a 2.4% decline in September and 2.2% in August. So despite the reduction in inventories, the big drops in sales mean that the inventory/sales ratio increased to 1.34 in October from 1.30 and 1.27 in September and August, respectively. While 1.34 is not high by historical standards -- it was in fact always higher that than prior to mid-2003 -- the two successive monthly increases in the ratio indicate the worst deterioration in the aggregate inventory position since the midst of the 1981-82 recession.

Manufacturers' stocks fell 0.6% in October and the previous month was revised down slightly, making a 0.8% drop instead of 0.7% reported initially. The combined decline of 1.4% basically reverses the 1.2% increase of the prior two months.

Inventories at wholesalers plunged 1.1% in the latest month, following 0.4% the month before, also producing a 1.4% drop over the two months. As Tom Moeller pointed out here a month ago, these moves have been heavily influenced by falling petroleum prices, as "tank farms" are included among the rolls of wholesalers. However, large as these price declines have been, they didn't account for the entire decline in wholesale inventories, which otherwise was still 0.4% in October and 0.3% in September.

At retailers, stocks edged down just 0.1%, following a 0.2% increase in September and a 0.7% decline in August. Here, of course, it's the motor vehicle sector that pushes things around the most. But recent anecdotes about dealers running out of parking lot for all of their unsold merchandise, even if true on a broad scale, are too recent to be covered in these data. In this report, inventories show little change, down 0.4% in September and just 0.1% in October. Among other retailers, inventories rose 0.4% in September but then also declined 0.1% in October. The weaker October sales meant that the inventory/sales ratio rose, though, to 1.32 from 1.28 in September, the largest month-to-month increase since December 1991.

Since petroleum prices are so important at this time, we made some calculations subtracting sales of petroleum products from wholesale and retail sectors and also netting out the relevant inventories. We're disappointed to see that the resulting sales figure is still down 2.5%, even as inventories fall just 0.4% for October. So the I/S ratio still rises sharply, to 1.36 months from 1.33 in September and 1.27 back in July. Possibly lower interest rates will help businesses finance these inventory positions, cushioning the blow to production that such an increase in the overhang might portend. But one thing we have learned in recent months is that it's best not to draw a firm conclusion on this.

This morning the Commerce Department reported that retail sales fell for the fifth consecutive month. The 1.8% November decline followed declines during October and September that were slightly greater than reported initially. Lower vehicle sales and lower gasoline prices accounted for last month's sales' decline. Elsewhere sales ticked higher, the first rise in the last four months. The latest shortfall in overall sales about matched Consensus expectations. The retail sales data are available in Haver's USECON database.

Motor vehicle & parts sales dropped 2.8% after declines of roughly 5.5% during both of the prior two months. As a result of these outsized declines, sales last month were down by one quarter from their year-ago level. The decline is less than the 36.7% y/y drop reported in unit sales of motor vehicles.

Lower prices pulled dollar sales at gasoline service stations down by 14.7% month-to-month and by nearly one-quarter from last year as gasoline prices fell 29.6% m/m to an average of $2.15 per gallon. Another downward leg is in store for December sales given that gasoline prices already have fallen 21% from their November average to $1.70.

Retail sales less autos and gasoline posted their first m/m increase since July. (It wasn't much of a gain.) They rose 0.3% after declines of roughly 0.7% during each of the prior three months.

Sales at furniture and electronics & appliance stores recouped all of their October drop with a 1.5% gain. However, that still left them down 7.8% y/y. Furniture store sales ticked up 0.2% (-10.9% y/y) after five monthly declines which ranged between 1% and 3% each month. Sales of electronics & appliance stores recovered 2.8% (-4.7% y/y) after a 2.0% October drop.

Apparel store sales ticked up 0.8% (-5.8% y/y) after three monthly declines which ranged between 0.7% and 4.1%. Doing somewhat better were sales at general merchandise stores which rose for the first month in the last five. The 1.2% gain raised them 2.6% from the year ago level.

Folks continued to pare their dining-out budgets. Restaurant & drinking place sales ticked up 0.2% last month, but the y/y gain of 2.8% compares to 5.2% growth last year and 6.0%+ growth during the prior three years. Steady near 10% y/y has been the growth in sales at drinking places while sales growth at both full-service and limited-service restaurants has fallen.

Building materials sales have fallen off a cliff with the downturn in housing. The 1.2% drop (-5.3% y/y) was the fifth decline in the last six.

Sales at nonstore (internet) retailers also have been hit hard. The 1.3% decline last month (-2.7% y/y) was the fifth in a row, a period during which sales have fallen 6.0%.

Last month U.S. finished producer prices fell 2.2%, about as they did during October when they were down 2.8%. Finished energy prices (-16.1% y/y) were down about as they were in October, by 11.2%. Gasoline prices led the decline with a one-third drop (-40.1% y/y).

Other oil based prices were down as well as home heating oil prices fell by one-quarter (-21.9% y/y). Natural gas prices fell for the fourth consecutive month but the 1.7% m/m decline left them still up 7.3% y/y. Bucking a steep downtrend residential electric power costs slipped 0.4% but they were up 6.5% y/y. (All of these energy price series are not seasonally adjusted.)

Finished consumer food prices were unchanged after their 0.2% drop during October. Strength in food prices still is evident in a 6.8% y/y gain led by a 18.5% rise in meat prices and a 10.1% rise in bakery product prices. Fresh & dried vegetable prices also were strong, up 12.1% y/y, but fruit prices fell 12.2%.

Less food & energy prices, the increase moderated to 0.1% after a 0.4% October rise. Consensus expectations were for a for a 0.1% uptick. The moderation follows four consecutive monthly increases between 0.4% and 0.6%. The y/y gain in the core PPI of 4.2% was near the strongest since late-1989. Prices of core finished consumer goods ticked up 0.1% (4.4% y/y), nearly the strongest since 1989. Durable consumer goods prices were unchanged (2.4% y/y). Appliance prices firmed and posted a 4.0% y/y rise following the 1.1% increase during 2007. Core nondurable goods prices also strengthened and rose 5.9% y/y, the fastest gain since early 1999. Prices for capital equipment also firmed. Though they ticked up just 0.1% last month, the 3.7% y/y gain is double the rise during last year and the strongest since 1989.

Intermediate goods prices fell 4.3% as energy prices dropped further. Excluding food & energy prices fell for the third consecutive month but the 2.3% m/m fall still left these prices up 6.4% y/y, more than double the increase last year.

The crude materials PPI was down sharply for the fourth straight month and the 12.5% decline about matched the earlier drops. Energy prices led the fall with an 18.7% (-28.8% y/y) drop. Crude food prices also were off 1.2% (-5.2% y/y). Less food & energy crude prices fell 20.4% with the drop in commodity prices.

The contribution to growth from IP is weakening sharply. The decline in IP, one that is an inflation-adjusted reading, is at a -13.5% rate in Q4. Consumer goods output is the strong sector, oddly enough, falling at a -3.8% pace early in Q4. Intermediate goods output is falling at a 19% annual rate in the quarter. Capital goods output is falling at a 15% annual rate in Q4. The fourth quarter is cropping up to be extremely weak.

The sequential growth rates from 12-mo to 6-Mos to 3Mos also show that the annual rate of decline in output is generally getting worse or staying near its worst growth rates across industries.

The results for the key large countries mirror the overall findings. Spain whose numbers are simply more volatile that the rest, shows the smallest quarter to date decline. I suspect that will change as more numbers roll in. Spain is not doing well. Germany, France and Italy each show a larger Yr/Yr decline in IP than the EMU-wide average for the current quarter. For Yr/Yr growth in IP France, Italy and Spain are worse than the EMU-wide average for MFG output.

The sting of decline is sharp in EMU and it has hit very hard in the last two months IP has been in sporadic decline in EMU as it had fallen (m/m) five times in 2007. But through October in 2008 IP already has fallen in seven of ten months. Moreover the declines in Sept and Oct have been severe and, of course, back to back. Output has dropped in five of the past six months. The outlook for the final two months is for the figures to stay bad or to get worse. No wonder the EU finally got around to approving a stimulus plan worth about 1.5% of GDP as the IMF suggested. There is no VAT cut as Germany’s Merkel has been opposed to that. But the EU may review further stimulus options later.