September’s ‘Stuff’ Economy and Sentiment

What do September’s retail sales and industrial production reports have in common? They both offer further evidence the US economy is getting back to normal after years of COVID-related disruptions, underscoring that this bull market’s economic fundamentals are faring fine.

Among lockdowns’ many economic consequences, they pulled forward demand for physical goods, leaving a crater in their wake once businesses reopened and demand flipped to services. This had knock-on effects on manufacturing, which hit double trouble from hung-over consumers and the auto industry’s parts shortages (another lockdown effect). Much of the world’s purported economic weakness stemmed from this, as did America’s persistent divide been spending on goods and services.

But lately, goods have shown signs of life. We can see this again in September retail sales, which accelerated to 0.4% m/m and notched their third straight positive month.^[i] That doesn’t sound like a lot, but it is the longest streak of the year. Better still, the control group—which excludes auto and gas sales and focuses on the categories that feed into the personal consumption expenditures report—sped from 0.3% m/m to 0.7%, the fifth-straight rise.^[ii] Among the major categories, only furniture, home furnishings and home electronics was in the red. Everything else—clothing, personal care, department stores, sporting goods, hobby shops—was up.

Recovering goods demand now seems to be filtering into industrial production. Yes, we know total industrial production slid -0.3% in September, with manufacturing down -0.4%.^[iii] But dig deeper. That decline stemmed from a drop in business equipment, with transit equipment down -14.2% m/m.^[iv] We suspect this has a lot to do with labor disruptions at a certain aircraft manufacturer—but that doesn’t reflect economic demand. Meanwhile, production of consumer goods rose 0.2% m/m, extending its choppy recovery from a gnarly 2022 and 2023.^[v]

Now, the US economy doesn’t need robust manufacturing growth to keep the engine humming. The last two years have already proven GDP can still grow when services—far and away its biggest component—is doing all the heavy lifting. Stocks, too, have demonstrated they can fare fine. But sentiment often seems to tie more to manufacturing than services, probably because “stuff” is tangible, countable and the data series are older and more established. Manufacturing also comprises the bulk of The Conference Board’s Leading Economic Index, which tends to shape expectations. As the buying and making of physical goods gradually recovers, it could instill more confidence.

Beyond that, one effect of the return to pre-COVID normal economic conditions has been slower GDP growth rates. This is another reason for investors’ lingering skepticism, and the divide between services and manufacturing leads people to believe slow growth is a precursor to contraction. Improving manufacturing should help cross this off the list of reasons to question the expansion and bull market and help people become more at ease with growth rates looking like they did before this experiment with stopping and restarting the global economy began.

Don’t expect a shift all at once. Monthly data are variable, and these things happen in fits and starts. It isn’t some big stock market driver, either, as we think this return to normal is part and parcel of what this bull market has been pricing in. But improving sentiment can be a modest tailwind, boosting investors’ willingness to take risk and bid stocks a mite higher than they would otherwise be inclined to.