Stocks remain well supported by economic fundamentals and we saw more reasons last week to be thankful as we head toward the holiday season.
Stronger Leading Economic Indicators: The Conference Board’s Leading Economic Index (LEI) climbed 0.9% in October, the most in three months, and above the consensus of 0.6%. Eight of its 10 components made positive contributions, led by fewer jobless claims. Over the past six months, the LEI increased 4.6%, the fastest pace since early 2010, excluding the pandemic. Similarly, the year/year change of the LEI posted 9.3%, far above the average 2.2% gain per annum, consistent with an outlook for stronger-than-average growth.
Retail Sales Jump: Retail sales jumped 1.7% in October, up for the third consecutive month, and by the most since March. It exceeded the consensus of 1.3%, in addition to an upward revision to 0.8% in the previous month from 0.7% originally. Retail sales are reported in nominal terms, so the increase partly reflects higher prices. Nevertheless, it also shows that higher inflation has not deterred consumers from spending, despite recent weakness in consumer sentiment.
Industrial Production Rebounds: Industrial production rebounded 1.6% in October, the most in seven months, and more than double the consensus of 0.7%. About half of the increase was due to a recovery from Hurricane Ida, which had disrupted operations in many chemical and energy facilities. Manufacturing output jumped 1.2%, its first increase in three months, led by an 11.0% surge in vehicles, the most since July 2020. Vehicle output has been severely impacted by semiconductor and other component shortages this year. The increase in October, which was the first in three months, suggests that the shortage crisis has likely eased (see additional supply chain commentary below). Excluding vehicles, manufacturing output was up 0.6%.
Mining jumped 4.1%, led by oil and gas well drilling while Utilities were up 1.2%. On a y/y basis, industrial production increased 5.1%, near its fastest pace since December 2010.
Housing Signals Remain Positive: While housing starts edged down 0.7% to a 1.5 million unit annual rate in October, building permits rebounded 4.0% to a 1.65 million unit annual rate, above the consensus of a 1.62 million unit rate. Both single-family and multifamily permits increased, and all four regions posted gains. The broad-based improvement in permits implies a pickup in housing starts in the near-term.
The increase in builder confidence in November is also a tailwind for starts in the coming months. The NAHB/Wells Fargo Housing Market Index (HMI—a measure of homebuilder confidence) rose three points in November to 83, above the consensus for an unchanged reading at 80. It was the third consecutive gain in the HMI, which is now matching its highest level since February. It shows rising builder confidence, driven by stronger housing demand and another pickup in perspective buyer traffic, despite persistent challenges from construction materials, labor, and lot shortages. The increase in confidence bodes well for housing starts in the next few months and we see housing as an important contributor to economic growth in the coming years.
Regional Fed Surveys Strengthen: Last week saw both the Empire General Business Conditions Index and the Philly Fed General Business Activity Index indicate better-than-expected regional factory activity.
Evidence of Supply Chain Normalization: After peaking at the end of September, the Drewry World Container Index of the average cost to ship a standard 40-foot cargo container across eight East-West routes had declined by 12% during the past six weeks (as of Nov 18th). Auto manufacturers have indicated that their semiconductor shortage is easing. Major retailers last week announced quarterly results and noted strong inventory availability as we enter the post-Thanksgiving holiday shopping season. This normalization should help ease inflationary pressures in the coming months.
Powell Re-Nomination Reduces Uncertainty: Markets do not like uncertainty and President Biden re-nominating Federal Reserve Chairman Jay Powell for a second term should be viewed favorably by the markets, especially considering that this indicates that the administration valued economic considerations more than political ones.