Yesterday we learned that the industrial production index came in with another decline, at -0.4%, vs. expectations of -0.2%, the fifth decrease out of eight reported figures in 2015. Clearly, this part of the economy isn't exactly booming.
Capacity utilization, which measures industrial slack, was expected to drop from 78% to 77.8%, but fell even further to 77.6%, for the seventh decline in eight readings in 2015. This is hardly shocking given the wide misses in manufacturing data reported by regional Federal Reserve banks for August.
Taking a bigger step back, capacity utilization is still well below the 10-year highs achieved just before the financial crisis. This gives us no reason to think we'll see significant improvements for companies such as Caterpillar (CAT), Action Alerts PLUS holdings 3M (MMM) and Honeywell (HON), Deere (DE) or United Technologies (UTX), which is also hurting from defense-spending cutbacks. Dear Janet: It doesn't look to us like this part of the economy is in danger of overheating.
We also received disappointing retail sales numbers yesterday, with August short of expectations, but July being revised higher. Month-to-month data can make us miss the forest for the trees, so let's look at the three-month moving average and year-over-year comparisons.
On a year-over-year basis, sales aren't too bad, up just over 2% across all categories. However, removing auto sales, sales growth is reduced to 1.4%, which isn't exactly robust. This shouldn't be surprising, though, considering the weak wage growth -- tough for retail sales to boom when income levels are barely improving. To get a better idea of the directional trend, however, we like to look at the three-month moving average.
Ugh, that is not a pretty sight! The only time in the recorded data going back to 1993 that the three-month moving average has been this bad was during the financial crisis. This means that retailers will likely continue to face headwinds, particularly those serving the lower- to middle-income households such as Wal-Mart Stores (WMT), TJX Companies (TJX), Ross Stores (ROST) and Action Alerts PLUS holdings Target (TGT) and Walgreens (WBA). Dear Janet: Another sign that the economy is not moving into a recovery.
When we think about retail sales, we also think about consumer credit card debt. Remember that the last time retail sales were booming, an awful lot of it was based on expanding credit card balances. According to CardHub, 2015 started out optimistic, with consumers paying down nearly $35 billion during the first quarter -- the usual post-holiday season new year "oh my god we need to cut back and not spend so much" reality check.
The second quarter, however, is really concerning, with consumers erasing all of the first quarter's pay down by racking up about $67 billion in new debt. This was the largest second-quarter increase since CardHub began tracking this data. Cardhub predicts that 2015 will likely end with a net increase of $60 billion in new balances, with the total credit card balances outstanding of more than $900 billion. This would set the average indebted household balance to around $7,813, which is the highest level since the Great Recession and just $615 shy of the level at which the company's research indicates balances become unsustainable and delinquency rates shoot up.
Hmmm, debt is reaching nervous levels and the Fed is thinking of raising rates? On a side note, this is rather ominous when you realize that before too long we will be shifting gears toward Christmas and other year-end holiday shopping, not to mention upcoming birthdays for both your authors! Dear Janet: Are you listening?
Second-quarter equivalent earnings for about 99% of S&P 500 companies have reported and the results are concerning. We now have the first year-over-year decline in earnings since the third quarter of 2012 and the first year-over-year decline since the Great Recession in revenue, which fell 3.4%. Dear Janet: Please be listening!
Add in the de facto tightening of monetary policy from the strengthening U.S. dollar (have you been following U.S. net export activity over last few months?) and the slowing global economy and we struggle to see how this Fed will be able to make a compelling argument for raising rates.
We would love nothing more than a return to a normal, healthy interest rate environment, but the problem is the economy today is a bit like dreaming of a bright future for a 17-year girl who's eight months pregnant, dropped out of school four years ago, ran away from home, and has covered her arms and neck with skeleton tattoos. It's possible, but it is going to take a heck of a lot to get from here to there!