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December 09, 2005

Can Consumers Save Christmas?
by Chad Hudson

While most economic data has continued to show the economy expanding, the consumer is showing signs of fatigue. The Labor Department reported that 215,000 jobs were created in November. This was just slightly better than the estimates of 210,000. It was also the most jobs created since July. The Labor Department also reported that average hourly earnings have increased 3.2% over the past year. This is the largest increase in earnings since early 2003. This also supports the anecdotal evidence suggesting labor shortages, especially in selected fields. The lack of wage pressure has been the main factor that has kept economists optimistic that inflation will be contained. Wage inflation would spell much larger problems than the rapid increase in commodity prices.

Both ISM surveys reported that the economy continued to expand in November, albeit at a slower pace than in October. The ISM non-manufacturing survey dropped 1.5 points to 58.5, but new orders advanced 1.3 points to 59.5 and employment rose 4.1 points to 57.0. While prices dropped 3.8 points, the measure still remains a very high 74.2. Prices have been over 65 for each of the past five months. Companies do not only have to contend with rising prices, but the transportation sector continues to show stress. After reaching an eight-year high last month, supplier deliveries rose again. Higher scores mean it is taking longer to deliver supplies due to either due to transportation issues or capacity constraints. The manufacturing side of the economy continued to expand as well. The November ISM survey dropped one point to 58.1, which was the thirtieth consecutive month that it has been over 50. The prices component dropped the most, down 10 points to 74, which was still the third highest level this year.

According to the ICSC, chain store sales increased 3.5% during November. While same store sales were up less than expected, it is difficult to characterize the environment as weak. Looking at the reports from thirty-three of the largest retailers same store sales rose on average by 3.3%, very close to what the ICSC reported. Because of store growth, total sales increased by 11%. When analyzing the strength of the consumer, this is a much more pertinent number. Additionally, it needs to be remembered that retailers do not record the sale of gift cards until they are redeemed for merchandise. While sales were good in November, they have weakened during the first week of December. This week, Prudential published a report that looked at the retail data provided from ShopperTrak RCT and Visa. Both of these showed that retail activity slowed rather dramatically last week. ShopperTrak said that sales growth fell from +9.2% during the last week of November to -9.3% for the first week of December. Visa showed the same reversal, but a much smaller scale. After adjusting for new cards and a shift from checks and cash, Prudential estimates that spending dropped 2% in the latest week compared to a 3% increase during the last week of November. This number would obviously be the most encompassing data point by including gift cards and online sales. With that said, Prudential expects holiday sales to pickup later in the season as the holiday season is longer than last year and includes five Saturdays versus four last year. Additionally, Hanukkah falls later in December this year.

Auto sales picked up a little in November to an annualized rate of 15.7 million. This was the first time since 1998 that auto sales were lower than 16 million for two consecutive months. The domestic automakers bore much of the brunt. General Motors' sales were down 11.3% (fleet sales were up 11% and retail sales fell 18.3%), Ford posted 18.1% lower sales and Chrysler's were down 6.6%. While the domestic automakers increased incentives by an average of $233 (7.8%) per vehicle in November, incentives are almost $1,000 lower than this summer. These lower incentives exacerbated the payback effect from the employee pricing this summer. Foreign automakers increased sales by 0.7% which pushed their market share up 340 basis points. Once again the foreign automakers were able to increase sales more without boosting incentives. Asian automakers increased incentives by only $27 (2.2%), while European nameplates increased theirs an average of $111 (6.1%). Perhaps the most disappointing aspect of the sales decline at the Big Three is the drop off in truck sales. Sales of trucks led the decline at each of the big three. Truck sales dropped 17.0% at GM, 22.5% at Ford and 11.2% at Chrysler. Conversely, Toyota sales increased 5.6% and its truck sales increased 3.8%. The Big Three have lost almost 400 basis points in light truck market share over the past year, from 69.3% to 65.2%. This does not bode well for the domestic manufacturers since trucks are the most profitable line of vehicles. The lackluster sales caused GM to pile on incentives once again, boosting incentives on its mid-sized SUVs.

Hovnanian Enterprises reported that earnings for its fourth quarter, three months ending October 31, 2005, increased 15.7% to $2.53. It said that in its "more highly-regulated markets, including California, Washington D.C., and the Northeast are returning to a more normalized level of activity with regard to both sales pace and price increases." Due to a variety of issues the company said it expects 2006 to be more backend loaded with first quarter earnings accounting for only 13% to 16% of full year earnings. First quarter earnings accounted for 17% of 2005 earnings. It appears the company is trying to put a positive spin on the fact that its first quarter earnings guidance of $1.10 to $1.25 is significantly lower than analysts' forecasts of $1.58.

CSFB issued a research note on Wednesday saying that its channel checks in the homebuilding industry "continued its downward adjustment." While it is difficult to gauge the market during the winter months, it noted prices were increasing "in only select markets and price points, incentives are more prevalent than is seasonally typical, and demand from investors is abating or shifting to lower cost areas." They also surveyed almost 1,000 real estate brokers in 60 major markets and found that demand and pricing fell from November.

Every time it appears that consumers will start to retrench, some form of stimulus has been injected to spur consumer spending. With the housing boom starting to get long in the tooth, the last boost to consumer spending will diminish. While it is likely consumers will come through for the holiday season, it might prove to be the last hurrah. For retailers, the expansion of retail space over the past several years will exacerbate any slowdown in spending.

Chad Hudson
Mid-Week Analysis
PrudentBear.com

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