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US Economics Weekly

US ECONOMICSWEEKLY

2 3

r d

N o v . 2 0 0 9

Editors: Julian Jessop and Paul Ashworth

A black mark against Black Friday?



Sales activity on Black Friday, which traditionally marks the start of the holiday shopping season,will be closely watched for signs that the better news on retail sales in October will continuethroughout the holiday season. But our analysis suggests that the performance of sales on BlackFriday may not be as good an indicator of overall holiday sales as is generally assumed.



Meanwhile, just at a point when there appears to be some semblance of life in the consumer afterall, there are signs that the recovery in the supposedly stronger parts of the economy may berunning out of steam. Housing starts and industrial production have recently started to falter.



For the moment, we are sticking to our forecast that GDP will grow by around 3% in the fourthquarter.

The bigger picture remains that the strength of the economic recovery is unlikely tosustained beyond the middle of next year.

(See pages 2-3.)

Data Previews

(page 4)

Existing/New home sales (Mon. 23

/Wed. 25

Nov.)

– Extended tax credit prolongs the recovery

Conference Board consumer confidence (Tue. 24

Nov.)

– High unemployment weighs on confidence

GDP (Tue. 24

Nov.)

– Pace of Q3 recovery to be revised lower

FOMC minutes (Tue. 24

Nov.)

– Minutes to shed more light on clash between hawks and doves

Durable goods orders (Wed. 25

Nov.)

– Growth rate of core orders has probably already peaked

Personal income & spending (Wed. 25

Nov.)

– Income growth remains weak

Economic & Market Data

(page 7)

Economic Diary & Forecasts

(page 8)

Recent Publications

(page 9)

North America

Europe

Asia

2 Bloor Street West, Suite 1740 150 Buckingham Palace Road #26-03 Hitachi TowerToronto, ON London 16 Collyer QuayM4W 3E2 SW1W 9TR Singapore 049318Canada United KingdomTel: +1 416 413 0428 Tel: +44 (0)20 7823 5000 Tel: +65 6595 5190Managing Director Roger Bootle (roger.bootle@capitaleconomics.com)Chief International Economist Julian Jessop (julian.jessop@capitaleconomics.comSenior US Economist Paul Ashworth (paul.ashworth@capitaleconomics.com)US Economist Paul Dales (paul.dales@capitaleconomics.com)

US Economics Weekly

The better than expected news on retail sales inOctober gave hope to retailers that the impendingholiday season will be filled with cheer. Overallsales value increased by 1.4% m/m. Excludingautos and gasoline sales, sales rose by 0.3% m/m.The latter is hardly spectacular, but it was the thirdmonthly increase in a row. What's more, thiscompares favourably to the same period last yearwhen between August and October this measure of sales

fell

by an average of 0.9% per month. (SeeChart 1.)

In other words, the run-up towards theall-important holiday sales season has not been toobad. But will it continue?

HART

ETAIL

ALES

UTOS

ASOLINE

)

Source – Thomson Datastream

All eyes on Black Friday

In that regard, all eyes will now fall on this week'sBlack Friday sales data for clues to how much bettersales are likely to be during the whole of theholiday season. For those new to the term, BlackFriday is the first sales day after the Thanksgivingholiday and is considered the start of the holidayshopping season. It is so-called as it marks the daywhen most retailers move from the red (losses) intothe black (profits). Sales on this day are oftenthought as a reliable indicator of sales over thewhole holiday season, but we are not so sure.Reliable measures of Black Friday sales with adecent back history are thin on the ground. The bestwe have found is the chain store sales dataproduced by the International Council of ShoppingCenters (ICSC). This is a weekly series so we assumethat sales activity in the week that Black Friday fallsis an accurate reflection of the performance of saleson Black Friday itself.The horizontal axis of Chart 2 shows the weeklygrowth of chain store sales in the week of BlackFriday since 1992. The vertical axis shows theaverage monthly change in official non-auto, non-gasoline retail sales during the holiday shoppingmonths of November, December and January.If the performance of sales on Black Friday is areliable gauge of sales during the whole of theholiday season, the line of best fit would slopeupwards from the bottom left-hand corner of theChart towards the top right-hand corner.Unfortunately, the line of best fit slopes the otherway. At face value, this suggests there may be asmall

inverse

relationship between sales on BlackFriday and sales during the whole holiday season.

In other words, strong sales on Black Friday maysimply reflect households bringing forward some of their intended holiday spending rather than a signthat spending over the whole holiday period willbe strong.

HART

LACK

RIDAY

ALES VS

FFICIAL

OLIDAY

ALES

Source – Thomson Datastream

Admittedly, this simple analysis is hardly 100%waterproof.

Nonetheless, it is a warning not to gettoo excited if Black Friday sales are reported to bestrong or too downbeat if they are not.

Either way,October's better than expected retail sales meansthat fourth-quarter consumption growth will not bea complete write-off, although it won't match theCash for Clunkers induced gain in the third quarter.

-2.5-2.0-1.5-1.0-0.50.00.51.01.5-2.5-2.0-1.5-1.0-0.50.00.51.01.5 JanFebMarAprMayJunJulAugSepOctNovDec

20082009 to date

-0.4-0.20.00.20.40.60.81.0-2.0-1.5-1.0-0.50.00.51.01.5

R e t a i l S a l e s E x . A u t o s & G a s ( % m / m A v . N o v t o J a n )

ICSC Chain Store Sales in Thanksgiving Week (%w/w)

A black mark against Black Friday?

US Economics Weekly

Recovery elsewhere losing steam?

Just as it appears that fourth quarter consumptiongrowth may not be as bad as we initially feared,there is some evidence that the recovery in thesupposedly stronger parts of the economy may bestarting to fade.The 10.6% m/m fall in housing starts in Octobersuggests that the 23.3% quarterly annualised leap inresidential investment seen in the third quarter willnot be repeated in the fourth. Housing starts havenow fallen back to a level last seen in April. At thesame time, the number of mortgage applications forhome purchase has plunged to a 12-year low. (SeeChart 3.)

HART

OUSING

TARTS

ORTGAGE

PPLICATIONS

Source – Thomson Datastream

Of course, both these trends may be linked to thehousing tax credit that was originally due to expireat the end of November. The extension andexpansion of that credit announced at the beginningof the month probably means that it is only a matterof time before housing starts and mortgageapplications bounce back again.Perhaps more worrying was the news that industrialproduction increased by just 0.1% m/m in October,the smallest rise for three months. What's more,even that modest gain was due to a weather-relatedsurge in utilities output. Manufacturing outputactually fell by 0.1%. (See Chart 4.) It is particularlyconcerning that business equipment output has nowdeclined for two consecutive months, suggestingthat the recovery in business investment may haveslowed in the fourth quarter.

HART

NDUSTRIAL

RODUCTION

)

Source – Thomson Datastream

Finally, the manufacturing surveys appear to suggestthat a renewed rebound in industrial production isnot on the cards. The fall in the shipmentcomponent of the Empire State survey in Novembermore than offset the increase in the same balance of the Philly Fed survey to push an average of the twomodesty lower. Chart 5 shows that this averagebalance is consistent with a slowdown in the rate atwhich manufacturing output is growing.Accordingly, there is a danger that the industrialrecovery may already have peaked.

HART

EGIONAL

HIPMENTS

ANUFACTURING

UTPUT

Source – Thomson Datastream

Overall, the better news on fourth quarterconsumption more or less offset the disappointingnews on residential and business investment. Forthe moment, we continue to think that GDPgrowth in the fourth quarter will come in ataround 3%. The bigger picture is still that a longperiod of fairly weak consumption growth willmean that the economic recovery ultimatelydisappoints.Paul Dales

Tel: +1 416 413 0428