Tom Moeller

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<p>The index of consumer sentiment from the Reuters/University of Michigan
survey slipped to 81.2 in the January survey from 82.5 during December. The
reading at mid-month was 80.4. The full month figure roughly matched
expectations for 81.0. During the last ten years there has been a 67%
correlation between the level of sentiment and the three-month change in real
personal consumption expenditures.</p>

<p>The index of current economic conditions fell moderately to 96.8 from 98.6.
The index of consumer expectations slipped to 71.2 and remained below the
October 2011 high.</p>

<p>These data are not seasonally adjusted and can be found in Haver's <b>USECON</b>
and <b>UMSCA</b> databases.</p>

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      <th class="firstcol" scope="col" >Reuters/University of
        Michigan (Q1'66 = 100)</th>
      <th scope="col" >Jan</th>
      <th scope="col" >Dec</th>
      <th scope="col" >Nov</th>
      <th scope="col" >Jan'13</th>
      <th scope="col" >2013</th>
      <th scope="col" >2012</th>
      <th scope="col" >2011</th>
    </tr>
  </thead>
  <tbody>
    <tr>
      <td class="firstcol" >Consumer Sentiment</td>
      <td  >81.2</td>
      <td  >82.5</td>
      <td  >75.1</td>
      <td  >73.8</td>
      <td  >79.2</td>
      <td  >76.5</td>
      <td  >67.3</td>
    </tr>
    <tr class="odd">
      <td class="firstcol" >&nbsp;Current Economic Conditions</td>
      <td  >96.8</td>
      <td  >98.6</td>
      <td  >88.0</td>
      <td  >85.0</td>
      <td  >92.4</td>
      <td  >85.6</td>
      <td  >79.1</td>
    </tr>
    <tr>
      <td class="firstcol" >&nbsp;Consumer Expectations</td>
      <td  >71.2</td>
      <td  >72.1</td>
      <td  >66.8</td>
      <td  >66.6</td>
      <td  >70.7</td>
      <td  >70.7</td>
      <td  >59.8</td>
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The index of consumer sentiment from the Reuters/University of Michigan survey slipped to 81.2 in the January survey from 82.5 during December. The reading at mid-month was 80.4. The full month figure roughly matched expectations for [...]

U.S. Consumer Sentiment Declines

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Andrew Cates

**Oil prices and yields**
Concerns about the global growth outlook, spurred by cuts from the International Energy Agency to their forecasts for demand, have driven oil prices sharply lower over the past few days. Fears about supply disruptions stemming from geopolitical instability in the Middle East have additionally faded, at least for now. Since oil prices have been a key driver of the market’s inflation expectations, as evidenced in chart 1 below, this has been significant in buoying risk appetite in broader financial markets as well.

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**UK inflation**
There was good news on the UK inflation front this week too thanks to a slew of weaker-than-expected data for wages and prices. For example, private sector regular pay growth rose by just 0.2% m/m August, its lowest monthly growth rate for seven months. The September data for both headline and core CPI inflation additionally dropped quite sharply, partly thanks to a big drop in service sector inflation (see chart 2). The Bank of England will almost certainly take comfort in these numbers, given concerns about how a tight labour market had previously been stoking wage inflation and fuelling price pressures in the service sector.

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**China’s PPI inflation** 
Recent data from China also revealed that inflation outcomes for September were lower than expected, with PPI inflation sliding further into deflationary territory, specifically dropping to -2.8% y/y from -1.8% in the previous month. This intensifying pace of deflation might magnify concerns about excess capacity in China's economy, which could potentially spill over into global markets as China seeks to export this surplus. Notably, China’s PPI has historically led global PPI trends, amplifying worries that this deflationary pressure might influence global inflation dynamics in the near future (chart 3).

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**EM portfolio flows**
Recent policy initiatives from China designed to shore up its economy initially generated much enthusiasm from investors. This can be seen in chart 4 below showing a surge in portfolio inflows to emerging markets, and to Asia in particular, in September. The specific spark for this was the introduction of a range of monetary stimulus measures on September 24th which included lower interest rates and cuts in reserve requirement ratios. However, that initial euphoria has since dissipated as the announcement of a number of fiscal policies designed to address local government debt risks and property market instability, have not meet expectations.

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**Banking conditions in the euro area**
On a brighter note the latest ECB bank lending survey suggested that the wheels of credit in the euro area may now be turning more quickly. The latest survey, for example, revealed that euro area banks reported unchanged credit standards for loans to companies in Q3. That follows more than two years of successive tightening. Banks also reported a further net easing of credit standards for loans to households for house purchases. In the meantime net demand for loans by companies increased moderately in Q3 while demand for housing loans rebounded strongly.

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**Global equity sector performance**
Global equity markets have had a good year so far in large part, as noted above, because the world economy appears to be on course for a soft landing and central banks have now begun to ease monetary policy. Structural factors, however, have also been influential, and most notably investor optimism about AI. As chart 6 below suggests, technology stocks have delivered the strongest returns so far in 2024. That’s striking because the technology sector is often perceived to be cyclical. Yet defensive sectors, such as utilities and consumer services, have also performed relatively well so far this year while other cyclical sectors, such as basic materials and consumer goods, have under-performed.

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A soft landing narrative has continued to shape sentiment in financial markets over recent days, supported by several factors. These include upbeat corporate earnings news, a sharp drop in oil prices (see chart 1), and weaker-than-expected inflation data (chart 2). However, concerns about global growth persist, particularly given the underwhelming economic data that’s been emerging from China (chart 3). While the monetary policy initiatives announced in late September were met with enthusiasm from investors (chart 4), subsequent fiscal policy measures have clearly fallen short of expectations. Back to a more positive note, the latest euro area bank lending survey suggests that the ECB's recent easing efforts, including this week’s 25bps rate cut, are starting to reap some benefits (chart 5). Meanwhile, ongoing optimism around the role of AI technology has also contributed to a soft landing narrative, despite the absence of clear productivity gains thus far (chart 6).

Charts of the Week: Following the Leader

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Total retail sales increased 0.4% (1.7% y/y) during September after an unrevised 0.1% August increase and a minimally revised 1.2% gain in July, according to the U.S. Census Bureau. A 0.3% rise had been expected in the Action Economics Forecast Survey. Excluding motor vehicles & parts, retail sales rose 0.5% (2.2% y/y) after increasing 0.2% in August, revised from 0.1%, and 0.5% in July, revised from 0.4%. A 0.2% gain had been expected.

Sales of motor vehicles & parts held steady (-0.3% y/y) last month after falling 0.4% in August. This compares to a 5.7% rise (2.2% y/y) in unit light vehicle sales which followed a 5.1% August increase.

Sales in the retail control group, which excludes autos, building materials, gasoline stations, and food services, rose 0.7% (4.0% y/y) in September, the fifth straight rise. These sales are used in the construction of personal consumption expenditures in NIPA accounts.

Elsewhere, sales performance was mixed in September. Miscellaneous store sales, which account for 2.2% of the total, surged 4.0% (7.9% y/y) in September after improving 0.3% in August. Clothing & accessory store sales increased 1.5% (3.5% y/y) after weakening 0.8% in August. General merchandise store sales gained 0.5% (2.6% y/y) following a 0.4% decline. Within that category, sales at department stores rose 0.4% in September (-1.2% y/y) after a 1.0% decline. Nonstore retail sales improved 0.4% (7.1% y/y) following a 1.6% rise. Sporting goods, hobby shop, book & music store sales rose 0.3% (-3.5% y/y) after they edged 0.1% higher in August. Building materials & garden equipment store sales rose 0.2% (0.5% y/y) after holding roughly steady in August.

To the downside, electronics & appliance store sales weakened 3.3% in September (-4.6% y/y) after falling 1.7% in August. Furniture & home furnishing store sales declined 1.4% (-2.3% y/y) after they eased 0.4% in August. Gasoline station sales dropped 1.6% (-10.7% y/y) last month, the fourth decline in five months.

In the nondiscretionary sales categories, health & personal care store sales rose 1.1% (4.6% y/y) in last month after a 0.6% August rise. It was the fifth consecutive monthly increase. Food & beverage store sales also were strong last month and rose 1.0% (2.5% y/y) after falling 0.5% in August.

Consumers’ penchant to dine out continued last month. Restaurant & drinking place sales increased 1.0% (3.7% y/y) in September, the sixth consecutive monthly rise.

Retail sales data can be found in Haver's **USECON** database. The expectations figures are from the Action Economics Forecast Survey in **AS1REPNA**.

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- Core sales post strong increase.
- Miscellaneous store sales surge.
- Motor vehicle sales steady while gasoline purchases fall sharply.

U.S. Retail Sales Pick Up in September as Nonauto Sales Firm

Winnie Tapasanun

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Total industrial production declined 0.3% m/m (-0.6% y/y) in September following a downwardly revised 0.3% increase in August (+0.8% initially) and an upwardly revised 0.6% drop in July (-0.9% previously), according to the Federal Reserve Board. The September IP index at 102.6, the same as in July, was 7.4% above a low of 95.5 in February 2021. A 0.1% m/m August easing had been expected in the Action Economics Forecast Survey. The Federal Reserve estimated that the Boeing strike weighed down September IP growth by 0.3% and the effects of two hurricanes subtracted another 0.3%. In Q3 2024, IP fell 0.2% q/q after a 0.6% q/q rebound in Q2 2024, falling at a 0.6% annualized rate following a 2.5% Q2 annualized rate of increase. IP rose 0.2% in 2023, 3.4% in 2022, and 4.4% in 2021.

By **industry groups**, manufacturing production fell 0.4% (-0.5% y/y) in September, the third m/m fall in four months, after a downwardly revised 0.5% increase in August (+0.9% initially). Durable goods production declined 1.0% (-1.3% y/y), down for the third month in four, following a 1.2% August rebound. This reflected m/m output drops of 8.3% (-5.8% y/y) in aerospace & miscellaneous transportation equipment, 1.5% (-0.6% y/y) in motor vehicles & parts, 1.5% (-5.2% y/y) in furniture & related products, 1.4% (+3.7% y/y) in electrical equipment, appliances & components, 0.5% (-3.8% y/y) in nonmetallic mineral products, 0.1% (-2.1% y/y) in machinery, and 0.1% (-1.3% y/y) in fabricated metal products. Notably, aircraft & parts production plunged 11.9%, the first m/m drop since May, following a 2.5% August gain. The following durable goods categories, however, increased m/m in September, including output rises of 1.4% (-2.2% y/y) in wood products, 0.7% (-5.5% y/y) in miscellaneous durables goods, 0.5% (-2.8% y/y) in primary metals, and 0.3% (5.2% y/y) in computer & electronic products.

Nondurable goods production rose 0.2% (0.5% y/y) in September, the fourth m/m rise in five months, after a 0.2% decline in August. The September rise reflected m/m output increases of 1.8% (+2.3% y/y) in petroleum & coal products, 1.0% (+6.7% y/y) in printing & related support activities, and 0.3% (3.0% y/y) in chemicals. To the downside, the following nondurable goods categories fell m/m in September, including output drops of 4.2% (-4.5% y/y) in textiles & product mills, 2.6% (-8.5% y/y) in apparel & leather goods, 0.6% (+1.0% y/y) in paper, 0.1% (-3.1% y/y) in plastics & rubber products, and 0.1% (-1.6% y/y) in food, beverages & tobacco.

Mining activity fell 0.6% (-2.2% y/y) in September, as the effects of two hurricanes on oil & gas extraction more than offset increases elsewhere. The m/m fall was the second in three months following a downwardly revised 0.7% August gain (+0.8% initially). In contrast, utilities output rose 0.7% (0.6% y/y), as electric & natural gas utilities increased, following declines of 1.3% (-0.04% initially) in August and 1.1% (-3.0% previously) in July.

By **market groups**, business equipment output slid 3.5% (-4.2% y/y) in September, the third m/m slide in four months, reversing a 0.2% increase in August. Materials production fell 0.2% (-0.9% y/y), down for the third month in four, after a 0.4% August increase. Construction supplies production dipped 0.1% (-0.2% y/y) following a 0.4% August rebound. To the upside, consumer goods output grew 0.2% (0.2% y/y) in September, the fifth m/m gain in six months, after a 0.6% rise in August, reflecting a 0.7% drop (-1.9% y/y) in durable consumer goods and a 0.5% rebound (0.8% y/y) in nondurable consumer goods.

In **special classifications**, factory output of selected high-tech industries advanced 1.5% (10.0% y/y) in September, the sixth m/m gain in seven months, on top of a 1.3% rise in August (+1.7% initially). Manufacturing production excluding selected high-tech industries fell 0.4% (-0.8% y/y) following a 0.5% August rebound and manufacturing production excluding selected high-tech and motor vehicles & parts fell 0.3% (-0.8% y/y) after a 0.2% August decline; both posted the third m/m fall in four months.

Capacity utilization fell to 77.5% in September after rising to 77.8% in August (78.0% initially). The Action Economics Forecast Survey forecasted 77.8%. The September reading was 2.2 percentage points below its long-run (1972–2023) average. Manufacturing capacity utilization fell to 76.7% in September from 77.1% in August (77.2% initially); the September rate was 1.6 percentage points below its long-run average.

Industrial production and capacity data are in Haver’s **USECON** database. Additional detail on production and capacity utilization can be found in the **IP** database. The expectations figures come from the **AS1REPNA** database.

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- September IP -0.3% m/m (-0.6% y/y); August gain revised down.
- Mfg. IP declines 0.4% m/m, w/ durable goods down 1.0% and nondurable goods up 0.2%.
- Mining activity drops 0.6% m/m, but utilities output rebounds 0.7% vs. two straight m/m falls.
- Key categories in market groups mostly decrease.
- Capacity utilization down 0.3%-pts. to 77.5%.

U.S. Industrial Production Drops in September, w/ Boeing Strike and Hurricanes Affecting Output

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The Housing Market Index compiled by the National Association of Home Builders/Wells Fargo rose 4.9% (7.5% y/y) in October to 43 after rising 5.1% in September. It remained below the break-even point of 50 where it’s been for the last six months. The index stands below a July 2023 high of 56 and a November 2020 peak of 90.

The average rate on a 30-year fixed rate mortgage rose to 6.44% last week compared to 6.32% in the prior week. It has averaged 6.29% this month, down from a high of 7.79% in the last week of October 2023, according to Freddie Mac.

The single-family sales measure rose 4.4% (2.2% y/y) to 47 this month from 45 in September. It was the highest reading since June. The prospective sales index in six months rose 7.5% (29.5% y/y) to 57 from 53 in September. It was the highest level in six months. The traffic of prospective buyers’ index rose 7.4% (11.5% y/y) to 29 in October. It was the highest level since May.

Housing performance across the country was mixed in October. The Northeast index fell 5.5% (+13.0% y/y) to 52 from 55. The index for the Midwest improved 4.9% (16.2% y/y) to 43 from 41 in September. In the South, the index improved 7.5% (unchanged y/y) to 43, but remained below the recent high of high of 52 in March. The index in the West increased 7.3% (22.2% y/y) to 44 from 41 in September. The index hit a low of 28 in November of last year.

The NAHB has compiled the Housing Market Index since 1985. It reflects survey questions which ask builders to rate sales and sales expectations as "good," "fair" or "poor" and traffic as "very high," "average" or "very low." The figures are diffusion indexes with values over 50 indicating a predominance of "good"/"very high" readings. In constructing the composite index, the weights assigned to the individual index components are: 0.5920 for single-family detached sales, present time, 0.1358 for single-family detached sales, next six months, and 0.2722 for traffic of prospective buyers. The regional indexes run back to December 2004.

These data are included in Haver's **SURVEYS** database.

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- Overall index stands at highest level in four months.
- Component performance is mixed.
- Regional indexes largely improve.

U.S. Consumer Sentiment Declines

Summary

Tom Moeller

More Economy in Brief

Charts of the Week: Following the Leader

U.S. Retail Sales Pick Up in September as Nonauto Sales Firm

U.S. Industrial Production Drops in September, w/ Boeing Strike and Hurricanes Affecting Output

U.S. Home Builders Index Increases in October

Reuters/University of Michigan (Q1'66 = 100)	Jan	Dec	Nov	Jan'13	2013	2012	2011
Consumer Sentiment	81.2	82.5	75.1	73.8	79.2	76.5	67.3
Current Economic Conditions	96.8	98.6	88.0	85.0	92.4	85.6	79.1
Consumer Expectations	71.2	72.1	66.8	66.6	70.7	70.7	59.8