Author: Chad Symens

June 11, 2014

Last week:  The U.S. economy generated almost 200,000 new jobs in May, continuing a trend that is now more than a year old.  Indeed, consistently generating that many new jobs is slowly beginning to encourage some discouraged workers to start looking again.  As these developments continue, there will be less slack in the labor market and more instances of tightness in certain fields.  And that, in turn, would put upward pressure on wage growth.  How much and how soon will be big questions later in the second half of this year and into 2015.  Meanwhile, consumers, now a little more confident, will pick up the pace in spending.  And the economy, with a much better second quarter (after a weather-induced decline in the first quarter), will do even better this summer, as the third quarter begins.

Retail Sales, May (Bureau of the Census)

Vehicle sales (at a 16.5 million pace in May) reflect some continued catch up, as consumers continue to replace old vehicles for newer and more fuel efficient models.  Nonauto retail spending has been quite uneven – with a significant gain in March but a very slow April.  It would not be a surprise if May’s data is more similar to March than April.  Retailers, still stuck with piled up inventory, are hoping that continued good news on the labor front enables consumers to put into action some long delayed plans, which in turn will bring the inventory-to-sales ratio back down to something closer to normal.  In fact, they have yet to resort to discounting in order to stimulate more in-store or web traffic.  If sales disappoint again, that could well be the next step in late spring.

Producer Price Indexes, May (Bureau of Labor Statistics)

Energy prices remain relatively stable.  Food prices are stable now, but could start to move a little higher.  “Core prices (which exclude food and energy) remain very low, rising by no more than 0.2 percent per month.  The concern has been more about prices slowing.  But if the economy is starting to gain some momentum, it could result in a little price acceleration, not in May but perhaps later this summer.

Source: The Conference Board

June 11, 2014

Consumer spending in May increased 4.2%, with the retail sector enjoying new vigor.  The spending increase of 4.2% compared to 4.1% in April.

Retail spending growth of 1.7% marked a slight uptick compared to April’s growth of 1.3% as warmer weather across most regions, with the exception of the Northeast, supported retail foot traffic.  Although the 1.7% increase lagged the total spending figure, May marked the strongest growth in seven months, primarily driven by spending at building material and supply dealers (6.7% in May vs. 3.6% in April) and furniture and home furnishings merchants (1.4% in May vs. -0.7% in April).  Average ticket growth of 1.2% in May gained steam against April’s 0.5% growth, driven by higher year-over-year gas prices, higher food prices and an increase in some leisure-related categories.

A number of factors, including normalized weather, pent-up demand, falling unemployment and rising home prices supported consumers’ willingness to spend in May.  Credit card spending growth continued to be strong and led all other payment types.  The surge in spending growth at hotel and travel merchants, building material and home furnishing merchants, where credit is the primary payment tool, was a major driver supported by easing lending standards and payroll growth.

Other areas of growth included hotel spending growth of 9.3%, a 12 month high, compared to April’s 7%.  Gas station spending growth of 3.6% was higher compared to April’s growth of 3.3% and was another key supporting factor in overall growth as gas prices remained elevated versus last year.

Source: Retailing Today

June 9, 2014

The Conference Board Employment Trends Index (ETI) increased in May.  The index now stands at 118.58, up from 117.32 (a downward revision) in April.  This represents a 5.4 percent gain in the ETI compared to a year ago.

“The Employment Trends Index continues to signal solid job growth with an improvement in each of its eight components in the first five months of 2014,” said Gad Levanon, Director of Macroeconomic Research at The Conference Board.  “The need for employers to rapidly expand their payroll in light of strengthening economic activity is a major factor in the rapid decline in the unemployment rate.”

May’s increase in the ETI was driven by positive contributions from seven of its eight components.  In order from the largest positive contributor to the smallest, these were: Industrial Production, Initial Claims for Unemployment Insurance, Real Manufacturing and Trade Sales, Ratio of Involuntarily Part-time Workers, Number of Temporary Employees, Job Openings, and Percentage of Respondents Who Say They Find “Jobs Hard to Get.”

The Employment Trends Index aggregates eight labor-market indicators, each of which has proven accurate in its own area.  Aggregating individual indicators into a composite index filters out “noise” to show underlying trends more clearly.  

The eight labor-market indicators aggregated into the Employment Trends Index include:

• Percentage of Respondents Who Say They Find “Jobs Hard to Get” (The Conference Board Consumer Confidence Survey)
• Initial Claims for Unemployment Insurance (U.S. Department of Labor)
• Percentage of Firms With Positions Not Able to Fill Right Now (National Federation of Independent Business Research Foundation)
• Number of Employees Hired by the Temporary-Help Industry (U.S. Bureau of Labor Statistics)
• Ratio of Involuntarily Part-time to All Part-Time Workers (BLS)
• Job Openings (BLS)
• Industrial Production (Federal Reserve Board)
• Real Manufacturing and Trade Sales (U.S. Bureau of Economic Analysis)

Source:  The Conference Board

June 3, 2014

Father’s Day is already the smallest of gift-giving holidays and this year Americans are expected to spend even less, according to the National Retail Federation’s (NRF) 2014 Father’s Day Spending Survey.

The survey found that the average person will spend $113.80 on neckties, tools, electronics and other special gifts for dad, slightly down from $119.84 last year.  Total spending for the holiday is expected to reach $12.5 billion.

“Knowing both cost and sentiment are important to their shoppers, retailers this Father’s Day will make sure to offer promotions on a variety of gift options, including home improvement items, tools and even apparel,” said NRF president and CEO Matthew Shay.  “As more people look for ‘experience gifts’ with tickets to baseball games or a day on the golf course, retailers will also make sure to promote their gift cards for families hoping to create the perfect gift package.”

While most people (64.1%) will simply say thank you to dad with a greeting card, four in 10 (41.6%) will treat dad to new apparel items such as neckties and sweaters, spending a total of $1.8 billion, while another 42.6% will celebrate with special outings such as dinner or a ticket to a sporting event, spending a total of $2.5 billion.  The survey also found that those celebrating Father’s Day will spend $1.6 billion on electronic gifts like smartphones and tablets, and $1.8 billion on gift cards, letting dad pick his own special gift.

Consumers will also spend on tools or appliances ($663 million), sporting goods or leisure items ($662 million), home improvement items ($645 million), personal care items ($641 million), books or CDs ($555 million) and automotive accessories ($520 million).

Dad’s loved ones will look for gifts at a variety of locations, including discount stores (28.1%), online (28.4%) and specialty stores (24.2%); 16.6% say they plan to support their communities and shop at a local or small business to find gift items for dad.  Most shoppers, however, will head to dad’s favorite department store (35.8%).

“As we saw with Valentine’s Day and Mother’s Day this year, consumers are keeping to a strict budget,” said Prosper Insights Director Pam Goodfellow.  “Whether they spend $10 or $100, millions of Americans will find creative, affordable ways to show dad how much they care.”

On-the-go shoppers will use their smartphones and tablets to research and purchase gifts for dad this year.  Nearly one-quarter of smartphone owners (23.4%) will research products and compare prices on gifts using their smartphone, and three in 10 tablet owners (30.6%) will do the same.  Nearly one in five (18.2%) will purchase products with their tablet for Father’s Day.

More than half of survey respondents plan to shop for their father or stepfather (52.3%) and 27.6% will look for ways to show their appreciation for their husband.

Source: Retailing Today, National Retail Federation 

June 3, 2014

Undeterred by bad weather and competitive pressures that took a toll on its first quarter performance, Dollar General is pressing ahead with plans for 700 new stores, recently opened its 12th distribution center and believes its full year profit forecast is attainable.

The company said sales during its 13 week quarter ended May 2 increased 6.8% to $4.52 billion, while same store sales increased 1.5%.  Although the comp figure was below the company’s expectations for an increase in the range of 2% to 3%, customer traffic and average transaction size still grew, according to the company.  Driving the gain were consumable category sales which were said to have significantly outpaced non-consumable categories.  Tobacco products, perishables and candy and snacks were top performers, according to the company.

“Dollar General’s first quarter same-store sales improvement of 1.5% was driven by growth in our consumables business and, overall, reflected the challenges of unfavorable winter weather, heightened competition and the current economic environment,” said Rick Dreiling, Dollar General’s chairman and CEO.  “Even as these factors weighed on our sales results, we saw trends improve as we moved through the quarter and we delivered (earnings per share) 72 cents, which was in line with our guidance.”

The company aided its EPS cause through aggressive share repurchase activity which made it possible to hit the low end of its targeted profit range of 72 cents to 74 cents.  Analysts had expected the company to report earnings per share of 73 cents.  Dollar General said it spent $800 million during the first quarter to repurchase 14.1 million shares, an amount that is roughly one third of the total 44.5 million shares repurchased for $2.3 billion since the program was authorized in December 2011.  The big reduction in shares helped boost earnings per share by two cents.  First quarter net income of $222 was essentially flat with the prior year profit of $220 million.

While Dollar General was able to hit its profit target, the lack of top line growth caused gross margin and expense leverage challenges.  Gross margins declined 57 basis points to 30% of sales which the company said was attributable to lower margin consumables comprising a larger portion of sales and higher markdowns related to promotional activity.  Meanwhile, expenses increased to 21.6% of sales from 21.3% of sales as moderate comp store growth caused the company to lose leverage while it also faced increased rent and utility costs.

Despite these challenges, Dollar General maintained its breakneck pace of growth during the quarter, opening 214 stores and a 930,000 sq. ft. distribution center in Bethel, Pennsylvania.  The company also confirmed its full year profit forecast and plans to open 700 new stores and remodel 500 others.  The company ended the first quarter with 11,338 stores throughout the U.S.

“We continue to grow both our customer traffic and average transaction amount as our merchandising initiatives reinforce our affordability and value messaging,” Drelling said.  “Sales trends began to improve in April and have continued to gain momentum.  We are pleased to see that our merchandising strategies are gaining traction with a strengthening of sales in both consumables and non-consumables in our second quarter to date.”

Dollar General, like many other retailers, is beginning 2014 in somewhat of a hole after reporting weaker than expected sales and profits aided by share-repurchase activity.  Going forward, the company is going to need a heightened level of spending among its cash-strapped core customers to achieve a full year profit target which was left intact.

Total sales this year are expected to rise between 8% and 9% with same store sales expected to grow between 3% and 4%, according to the company.  Full year profits are expected to range from $3.45 to $3.55 which is the same forecast the company shared when it reported fourth quarter results earlier this year.

Source: Retailing Today

June 5, 2014

Residential construction is a key engine behind growth in the United States.  According to McGraw Hill Construction’s Dodge Construction Market Forecast, single and multifamily housing projects account for about 45% of the value of all construction projects started in the United States in 2014.  With that market forecasted to grow rapidly in coming years, the green activity and drivers in the market are critical.  The SmartMarket Report of the single and multifamily builder and remodeler community released today contains this new intelligence.

The report, “Green Multifamily & Single Family Homes: Growth in a Recovering Market,” surveys builder and remodeler members of the National Association of Home Builders and reveals the evolution of green building for single family homes from boom to bust to recovery through comparisons with previous studies from 2006 to 2011, and includes new data on multifamily housing to provide a comprehensive review of the sector.

According to the latest study:

• 62% of firms building new single family homes report that they are doing more than 15% of their projects green.  By 2018, 84% of them expect this level of green activity.
• 54% of firms building new multifamily projects report that they are doing more than 15% of their projects green.  There is also growth expected – with 79% reporting the same level of activity anticipated by 2018.
• In the single family market, the most striking shift is in those firms dedicated to green building (doing more than 90% of their projects green).  That percentage is already at 19%, and by 2018, it is expected to double to 38%.

The study finds that builders and remodelers in both the single family and multifamily sectors report that the market is recognizing the value of green: 73% of single family builders (up from 61% since the last report) and 68% of multifamily builders say consumers will pay more for green homes.

“Greater consumer interest in green homes has contributed to the ongoing growth, leading us to anticipate that by 2016, the green single family housing market alone will represent approximately 26% to 33% of the market, translating to an $80 billion to $101 billion opportunity based on current forecasts.  The findings also suggest that lenders and appraisers may be starting to recognize the value of green homes, making it a factor that could help encourage the market to grow if there is more widespread awareness across the U.S.,” said Harvey Bernstein, vice president, Industry Insights and Alliances for McGraw Hill Construction.

The study also examines the triggers for green building activity.  “This new study demonstrates phenomenal growth in green building, with more builders engaging in sustainable building practices than ever before,” said NAHB Chairman Kevin Kelly, a home builder and developer from Wilmington, Delaware.  “While growth in green in the single family market is driven more by high utility incentives, as well as enhancing their competitive position and corporate image.  All are compelling reasons for the industry to engage with this continuously growing market.”

The SmartMarket Report also reveals a vigorous and growing renewables market in the residential sector.  65% of the respondents – both single family and multifamily – currently use renewables on at least some of their projects, and the percentage that incorporate them in all of their projects is expected to grow from 8% in 2013 to 20% by 2016.

“Green Multifamily & Single Family Homes: Growth in a Recovering Market” was produced by McGraw Hill Construction in partnership with the National Association of Home Builders, with the support of Waste Management and Menck Windows.

Source: National Association of Home Builders

June 5, 2014

Warmer weather in May meant an uptick in store traffic for a few retailers, including Costco.  But the wholesale retailer’s same-store sales for the month – which increased 6%, with a 6% rise in U.S. sales and a 4% increase in international sales –  were better than analysts had expected and bolstered by higher fuel prices.

The company reported net sales of $8.78 billion for the month, an increase of 8% from $8.13 billion during the similar four-week period last year.

In the United States, same-store sales increased 6%.  Total company same-store sales also increased 6%.

For the 39 weeks ended June 1, the company reported net sales of $81.99 billion, an increase of 6% from $77.13 billion during the similar period last year.

Source: Retailing Today

June 6, 2014

The economy generated a gain of 217,000 jobs in May, compared with an average of nearly 200,000 per month over the past year.  Job growth may strengthen even further over the second half of the year as the economy picks up in pace.  Improving final demand is forcing business to add workers.  The underlying hiring trend, especially in professional services, is encouraging, with more good news expected through the summer and into the autumn months.  More jobs means more pay checks, lifting sentiment and resulting in still more consumer buying.  It will also induce businesses to invest more in equipment and human capital so that new workers can get the job done.  In sum, the strong trend is continuing for now, but could even speed up a little over the next few months.

Source: The Conference Board

June 4, 2014

WTI expects June 2014 to trend similar to last year and above normal for the U.S. as a whole.  Cooler and more normal temperatures can be expected from the Western Plains to the Rocky Mountain states.  Temperatures will be cooler than last year along the West Coast, but still above normal with slightly weaker demand for summer categories.  In the Northeast, temperatures will trend similar to last year while precipitation trends drier than a very wet June 2013, which will benefit store traffic and increase demand for outdoor categories.  Meanwhile, rainfall will be greater in the Central Plains compared to last year.  Warm and humid weather across the South will help drive incremental gains in swimwear, pool chemicals, beverages, air conditioners and summer apparel.  Sales will be flat to down slightly in the Northeast.  A cold front will sweep through the East late in the final week of June which will usher in a cooler and drier air mass for the Fourth of July weekend.  June 1 signaled the official start of the Atlantic Hurricane Season.  This season overall is forecast to be below average in terms of tropical activity, but should a storm develop in June, the highest risk area will be southern portions of the Gulf of Mexico and Caribbean.

Source: Retailing Today, Weather Trends International

June 2, 2014

Last week:  For the second week in a row, the bond market made the biggest headlines.  The Federal Reserve is tapering down its quantitative easing (buying fewer bonds) and the economy is catching up from a bad winter.  With sentiment up, strong job growth and some renewed strength in the ordering rate, one might think artificially low borrowing rates would be moving back toward normalcy (something reflecting a 2 percent inflation rate, and maybe a 2 percent risk factor).  Instead of moving up to about a 3 percent yield on a 10-year Treasury bond (on its way higher, assuming sustained economic growth), yields fell from above 2.7 percent to 2.45 percent this week.

Moreover, it’s not like stock prices are falling or volatility in stocks is sending money into the bond market.  Rather, the bond market is making a bet that the economy is more likely to lose steam and gain momentum.  The economic data point to gathering strength.  And that’s the view of professional economists (as much as 4 percent GDP growth this quarter, annualized), and that’s on track with a slow build in consumer sentiment as well.

Who is right?  Maybe the better question is what is the proper way to view all this.  German bond yields are almost a full point lower than U.S. bonds right now.  And Japanese bonds are even lower.  So one could argue that money is flowing away from other markets to chase the higher yield, sending prices of U.S. bonds up, which sends yields lower.  If one takes that view, it would follow that money flowing away from bonds elsewhere is also decreasing money there, keeping the euro much above its purchasing parity level.  This is not an argument justifying lowering yields but it does suggest lower yields are more reflective of what is not happening elsewhere around the globe than what is happening domestically.

Employment Situation, May (Bureau of Labor Statistics)

The economy opened up more than 250,000 new jobs in April.  The figure for May might come back to about 200,000, or about the trend growth of the past 12 months.  Still, this would be a reflection of an ecoonomy gaining strength.  And the paychecks from these new jobs, along with slowly rising sentiment, could fuel replacement buying.  That includes consumers replacing old worn furniture and appliances along with continued vehicle replacement.  And with final demand finally picking up, there very well could be more business investment – giving these workers the necessary tools to get the work done.  Money for investment is not the issue.  Indeed, neither is sentiment as surveys of attitudes of business executives through the first quarter reflect an uptick in optimism.

An uptick in consumer spending and business investment is a recipe for continued job growth of more than 200,000 per month for at least the next few months.  In other words, the economic cycle could well start spinning a little faster, just as The Conference Board Leading Economic Index has been signaling.  Look for more construction jobs, service sector jobs, perhaps even some manufacturing jobs.

Regionally, hiring has been the weakest in the service-dominated big population centers in the Northeast and Midwest.  If the labor market is turning more robust, it is likely that service-sector employment in these markets is starting to pick up.

Source: The Conference Board