I keep expecting the US consumer to slow. After all, the job market has come off the boil, wage growth has plateaued, most of the excess savings we all amassed during the pandemic has been spent away, and prices have yet to find their reverse gear – something consumers have repeatedly expressed frustration about and often causes a pullback in spending.

And for a while, consumers did cool it: retail sales have declined month-over-month three times so far in 2024 (in January, April and June,) and year-over-year growth has declined significantly since peaking at over 50%(!) when the post-pandemic revenge splurge began to rage. But there was almost no hint at all of a slowdown in Thursday’s retail sales report for September: sales grew 0.4% last month while so-called “control group sales” – a weird conglomeration of taped-together items that the Bureau of Economic Analysis uses to calculate GDP growth – was up 0.7%.¹ Both of those numbers were higher than economists expected, pretty much guaranteeing that the US consumer will be shown to have made yet another big, positive net contribution to economic growth when third quarter numbers are released in a few weeks.

As with all economic data, there are plenty of caveats in last week’s retail sales numbers if you’re willing to look hard enough. The most obvious was the so-called “adjustment factor,” without which sales would’ve actually declined pretty significantly across most categories in September. There’s no conspiracy here, the Census Bureau (curator of the retail sales numbers) makes a legitimate and very thoughtful attempt to correct for seasonal variations and the fact that some months simply have more shopping days than others. But it’s still worth pointing out that much of the growth in sales that markets got so excited about last week was driven by a statistical model and not consumers themselves.

But far more interesting is where people are spending, not how much (or the extent to which the data were massaged to a robust gain.) For example, even on an adjusted basis, sales at electronics, appliance and furniture stores declined pretty significantly (gas stations, too, but that’s almost certainly a function of the 5%-plus decline in gasoline prices since August.) Not coincidentally, furniture and appliances are two reasonably large categories that tend to be very sensitive to turnover in the housing market, which remains constrained by poor affordability and a persistent lack of available inventory. FWIW, that’s one of the reasons that a sustainable uptick in housing activity would go a long way toward increasing confidence in the durability of consumer spending economic growth. (And as an aside, last week’s data did little to change the housing picture: housing starts and permits both declined, and the National Association of Homebuilders’ housing sentiment index improved only marginally, suggesting that inventories and affordability will stay strained for a big segment of would-be buyers).^2,3

It's also interesting to note that spending for things that people “want” is arguably growing far more slowly than things they “need”. Admittedly, this analysis is kind of hard to do given a lack of granularity built into the retail sales figures, not to mention the ambiguity of huge categories like “non-store retailers”, which represents 16-17% of total retail sales and includes web-based purchases (Question: is the toilet repair kit I bought on Amazon last week a “want” or a “need”? You decide...) Either way, it’s not hard to build a case that consumer purchases are becoming less discretionary and more value-conscious as the economy continues to dither between growth and not-growth. Support, I suppose, for your grandpa’s dusty advice to buy what you need, not what you want, especially when the future starts to look a little murky.

Wanna know who else is focusing on buying what they need? Businesses. At least according to the Philadelphia Federal Reserve Bank’s (Fed) regional manufacturing survey, also released Thursday. The “special questions” section of this and other regional Fed reports are often where the tastiest data lives, and this month’s was a potential hum-dinger (another one of grandpa’s favorite phrases.) Specifically, the Philadelphia Fed polled respondents about how much they plan to reinvest back into their businesses next year in the form of capital spending (or “capex” if you want to sound like a finance bro instead of a dusty old grandpa.) 

As always, it pays to use this and other regional Fed surveys with caution: it involves only a small(ish) segment of the economy (manufacturing) and only focuses on a specific region of the country (in this case, the area in and around Philadelphia and greater PA.) But the results were interesting nonetheless: a year ago, which is the last time the Philly Fed asked that question, more manufacturers in the region expected to decrease capex than increase it. This time, though, there was a clear desire to invest: 51.5% expect to increase re-investment in their businesses compared to 21.1% who expect to cut back. That’s an obvious change from a year ago and a pretty clear indication that business confidence has improved as a result of Fed rate cuts, continued belief in the “soft landing” narrative, or both.

But just like last week’s retail sales report, where businesses are expecting to spend that cash is at least as interesting as how much they’re planning to spend. The two categories that topped the wish list compiled by the Philly Fed? Software (a net 24.2% of the area’s manufacturers are expecting to increase software purchases) and computer hardware (net +30.3%). It’s a small and somewhat ambiguous anecdote, but should be music to your ears if you’re a ‘magnificent’ trying to grow into your super-sized market cap (or an economist trying to justify the AI hype), because it suggests that potential users of AI – not just the model-trainers and code writers – are starting to look ahead into AI’s electric dreams and backing it with real dough.

Finally, a quick note about earnings. So far, third quarter results have been pretty good: last week’s highlights included a basket of banks that once again proved it pays to do non-bank things like equities trading and facilitating arranged marriages between public companies when rates are volatile (Goldman Sachs, Bank of America, Morgan Stanley and Citigroup all beat estimates at least partially as a result of strength in their capital markets businesses,) while United Airlines proved to be a visible counterpoint to Delta’s disappointing guidance earlier this month when it called out a “clear inflection point in revenue trends” during the quarter after discounting and over-capacity had rattled the industry seemed to dissipate. Perhaps even more encouraging was a similar sentiment from trucking company JBHunt, which saw a clear pick-up in intermodal demand throughout the quarter – that’s the train-to-truck segment that is responsible for moving so much stuff from one US coast to the other and back again. While the bulk of 3Q results are still ahead of us, I think we can at least breathe a sigh of relief and say “so far, so good” as far as earnings are concerned.

What to watch this week

Third quarter earnings season begins to pick up steam this week with a number of transportation and logistics companies set to either validate or refute the reasonably strong message sent by JBHunt last week. Examples include UPS on Tuesday, rail operators Canadian Pacific and Union Pacific (Wednesday and Thursday, respectively,) and fellow trucker Old Dominion (on Wednesday). These companies and their peers represent a great way to cross-check assumptions about consumer demand because they depend on the physical movement of goods for their livelihoods. Under- or outperformance by any one of them might be dismissed as company-specific, but if they’re all saying roughly the same things with roughly the same enthusiasm, you can bet there is at least some signal buried within the noise.

Meanwhile, a handful of airlines (American, Southwest and Spirit) will do the same for consumer- and travel-related demand that the transport companies are doing for logistics. Depending on the tone of the calls and the body language of their executive teams, these companies will either endorse United’s strong message last week, or Delta’s less upbeat tone during the prior one. For other reads into the minds of consumers, you could do worse than to look into GM’s results on Tuesday, Tesla’s on Wednesday or Harley-Davidson’s on Thursday. Add staples companies 3M (Tuesday) and Colgate-Palmolive (Friday), and you should have a pretty good idea about whether last week’s surge in retail sales is for real, or a statistical blip.

In terms of scheduled releases, Monday’s update of the Conference Board’s Index of Leading Economic Indicators (or “LEI”) and is similar-in-spirit Chicago Fed National Activity Index (“CFNAI”) on Tuesday will attempt to put a forward-looking spin on recent data by tallying up those indicators economists believe have some value in predicting the economic future. Ditto for Thursday’s “flash” PMIs, which tend to be among the more forward-looking releases on each month’s calendar because they as business leaders about what they’re seeing today as well as how they’re preparing for the near future. Look closely to see whether the recent trend of weaker manufacturing and stronger services activity has changed at all. We’ll also get two more regional Fed manufacturing reports (Richmond on Tuesday and Kansas City on Thursday) to augment that view.

We’ll also get the second monthly installment of housing-related data with existing- and new home sales data expected Wednesday and Thursday, respectively. For a more contextual view, pay attention to Tuesday’s earnings release from Pulte Homes – of particular interest there will be the extent to which Pulte – a national-scale homebuilder – is relying on discounts and incentives to boost sales. That was one feature of last week’s National Association of Home Builders builder sentiment report that went under-reported.

Finally, Wednesday’s release of the Federal Reserve’s Beige Book – a compilation of “on-the-ground” economic insights from the Fed’s 12 geographic districts – might also be worth a glance. The Beige Book sometimes makes for pretty dull reading, but this edition will include the impacts of Hurricane Helene (which visibly impacted weekly jobless claims several weeks ago) and possibly even Milton (Milton made landfall in Florida on October 10^th, which is likely very close to the cutoff period for which this version of the Beige Book will have been compiled.) Storm-related impacts are usually temporary but sometimes severe, and the tone and character of comments made by the Atlanta Fed (District 6, which includes the state of Florida and parts of Tennessee,) Richmond (District Five, including both North and South Carolina) and St. Louis (District 8, Tennessee and parts of Kentucky) could provide hints about how likely these catastrophes are to influence near-term activity both regionally and nationwide.