US Savings, Japan Inventory/Shipment Ratio, Spanish Retail Sales -Three To Watch

Three shocks and surprises from last week's data which are worth thinking about: 

1. US Savings Ratio - After rising very sharply in 2Q, the household savings ratio is now falling fast - but how much lower will it go?
2. Japan Inventory/Shipment Ratio - Despite weak industrial production data, the inventory situation worsened again in September.  Prices will fall.
3. Spain Retail Sales - The collapse in September's sales was a 4.6 SD event


1. US Savings Ratio Personal income grew 0.4% mom in September, but personal spending rose at 0.8% - double the pace. The combination cut the personal savings ratio to 3.3%, nearly the lowest since end-2007 – a concrete manifestation of the recovery in consumer confidence found by surveys in the last two months. 

This is both good news and bad news. It is good news because the unexpected rise in household savings had compromised domestic demand growth since late-2011. As the savings ratio rose from a low of 3.2% in November 2011 to 4.4% in June 2012, so growth of personal consumption expenditure slowed from 2.8% (12ma 3Q11) to 2.0% (12m to 2Q12).  With wage growth slowing from 2.7% yoy at the beginning of the year to just 1.3% yoy in September’s data, the rise in savings ratio also cut into sales growth (5.9% in 1H2012 vs 7.6% in 2H2011).  The cut in savings ratio during 3Q will go some way towards cushioning retail sales from the impact of torpid income growth. 

The less good news is that it seems unlikely that the savings ratio has much further to fall: during pre-crisis 2000-2007 the savings ratio averaged 2.8%, with a standard deviation of 0.8pps. In the absence of a recovery in income growth, if the savings ratio now stabilizes, it will drain support from consumption demand.

2. Japan Inventory/Shipment Ratio  September’s industrial data was dreadful: production fell 4.1% mom, shipments fell 4.4%, inventory fell only 0.9% and consequently the inventory/shipment ratio rose 4.2% mom. This took the inventory/shipment ratio to its highest level since mid-2009, and 30% higher than the 2003-2007 average. 

The spike in this ratio rapidly results in two things. First, it heralds a further slowdown in production from the affected industries. Second, it also signals a fall in export prices, achieved with or without the aid of a currency fall – a deflationary twist which will be felt by all Japan’s trading competitors.  

So which sectors face the toughest situation? The transport sector is by far the worst affected, with a relatively mild upward trend throughout the year culminating in a spike during the last two months. It is tempting to attribute this spike to the deterioration in diplomatic and popular relations with China. Otherwise, the weaknesses are in consumer durables, in general machinery and electrical machinery, in precision instruments, and pulp & paper. But the sectors where the ratio has not built up include most of the usual commodity suspects: there is little sign of inventory build in iron & steel, in non-ferrous metals, in petroleum/coke products, or in ex-pharma chemicals. The inventory/shipment ratio for electronic parts and devices, meanwhile, is actually falling, suggesting tightening demand. The ratio for the information/communications equipment sector remains high, but has fallen sharply over the last two months.

3. Spain Retail Sales In volume terms, sales fell 12.6% yoy in September, and the 9.5% mom contraction was no less than 4.6 standard deviations below seasonal trends. This fall did more than reverse August’s  unexpected relative strength. During the first nine months of the year, Spain’s sales were 21.8% lower than during the same period in 2007, but on a 6m momentum basis, they are now weakening at the same pace as in early 2008 at the onset of the crisis. 

The main problem, of course, is employment, which shrank by 4.6% yoy in 3Q12, and in the latest 12 months was 13.6% (or 2.74mn) below the same period in 2007.   With October’s manufacturing PMI falling to 43.5 – its lowest in three months – and with firms cutting purchasing, inventories and jobs, there is no reason to expect any early jobs relief.   In addition to jobs, consumer credit is also being crushed, with consumer lending down 40.4% from its mid-2008 peak, and still falling by 11.7% yoy. Although this is no worsening against trend, the trend itself is running at a 20% fall over the coming year.