The stock market should continue to react to developments bearing on the probability of a fiscal stimulus bill being passed. A pre-election bill does not appear promising, however. Treasury Secretary Mnuchin will be in the Middle East for most of the coming week. The Republican small Senate bill won't go anywhere. And, Democrats don't appear willing to compromise further. This stalemate could weigh on stocks leading up to the election.
Three economic data reports last week appeared to have mixed implications for further fiscal stimulus. Exceptionally strong September Retail Sales argued against its need. But, the counter-consensus jump in Initial Unemployment Claims and decline in September Manufacturing Output (part of Industrial Production) argued the opposite. While the weakness in the latter two may be exacerbated by technical factors, they, along with the still-high Unemployment Rate, suggest further fiscal stimulus won't hurt. And, it is too soon to draw a firm conclusion about fiscal stimulus from the strong September Retail Sales.
The Retail Sales strength was widespread, with increases in brick and mortar stores notable. The latter suggests that the sales bounce may have reflected expanded re-openings of shopping malls around the country. The high Personal Saving Rate, as much of the earlier stimulus payments appears to have been unspent, may have fueled the surge in shopping. Retail Sales need not slow sharply in October, as the effect of re-openings could continue. Also, Amazon's Prime Day, as well as heavy discounting by other chains, will show up. But, some pullback after a surge would not be unusual. It is too soon to draw a conclusion about the need for additional fiscal stimulus from the September print.
The jump in Initial Claims in the latest week is disturbing. Unless it reverses soon, the higher unemployment will hit consumer spending and slow the economy. There is a technical issue regarding the number, however. California suspended processing Initial Claims for a couple of weeks in order to get through a large backlog of Claims. Their last reported weekly Claims figure is being carried forward until it resumes processing. This figure could distort the overall Initial Claims data, since it would not correctly reflect seasonal w/w movements. So, the Claims data should be viewed cautiously.
The decline in September Manufacturing Output would seem to support the weakness implied by Initial Claims. The decline was not widespread, however. A drop in Motor Vehicle Assemblies accounted for the decline. The motor vehicle drop appears to reflect a return to pre-virus levels, after production was boosted in July and August to rebuild inventories. Nevertheless, the flat Manufacturing Output Excluding Motor Vehicles still looks low relative to the increase in Total Hours Worked in Mfg (even excluding motor vehicles) in September (see table below). Some technical factor may explain the difference. Or, the difference could reflect an offset to the relatively stronger output over July-August. Output exceeded the increase in THW in July-August after essentially matching them over May-June. In principle, output should rise faster than THW over time because of productivity gains, but there still could be m/m mismatches. If the latter was the case in September, the flat Ex Auto Manufacturing Output overstates weakness. But, its decelerating path over Q320 supports expectations of slower economic growth in Q420, which, at the minimum, does not argue against more fiscal stimulus.
[ (m/m percent change) ]
Total Hours Worked in Mfg Mfg Output Mfg Output Ex Motor Vehicles
May 4.9 3.6 1.9
June 5.9 7.8 3.9
July 2.5 4.3 2.2
Aug 0.6 1.1 1.7
Sep 0.4 -0.3 0.0
Total 15.1 17.4
Carl, I always like your stuff. Thanks. Mark
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