Retail sales data in the US mean better growth expectations

Today’s commentary

The data for the holiday season suggest that that consumer spending in the United States remains robust. Though wage growth has yet to pick up, consumer spending remains robust enough to fuel further economic gains into 2014.

I am generally in a bullish frame of mind on the US economy. However, what I am looking for in the data are signs that the baton is being passed from a housing- and consumer-led recovery to a wage and jobs led one. And that means what we want to see are larger gains in job and wage growth going forward that allow consumers to spend without dissaving or releveraging. We are not there yet. But the level of consumer spending is enough to raise Q4 GDP growth expectations. Consensus is for 2.5%.

A lot of what I have seen in the media was about retailers discounting heavily in order to capture sales because of a fear that sales were going to be weak. This AP story that ran on Christmas Eve is typical. Credit Writedowns contributors Sober Look and Lance Roberts have also been concerned about slowing retail spending. Since October, they have written a series of posts about weakening retail sales data. See here and here for Lance and here and here for Walter (Sober Look).

Like Sober Look, I have been concerned about inventories and retail sales, but I have been a bit more sanguine about actual retail sales. I have been saying retail sales will support about 2% GDP growth for Q4 and more in 2014 despite any incipient inventory destocking. According to Gallup, holiday spending intentions were modest. However, in terms of the most recent actual data, October was revised up, November was above expectations, and sales were growing 4.7% in the previous year. So, what we are seeing then is pretty decent sales numbers with concerns that inventories and a lack of wage growth could bring down GDP.

AP ran another retail story on Christmas Eve showing holiday sales down for a third straight week. But again, the data are saying retail sales are holding up. It may be the shift to online sales is masking more robust growth. For example, the Wall Street Journal reported that online sales jumped 37% in the weekend before Christmas. And they also reported that the late surge in online sales caught the retailers and delivery companies out, causing some shoppers to not receive packages on time. Moreover, the most recent consumer spending data show personal consumption expenditures expanding by 4.1%-4.6% in Q4, with the personal savings rate declining to 4.2%. I expect to see good numbers for GDP and am raising my expectations to above 2% growth.

In the third quarter, GDP was up 4.1% while consumer spending was only up 2.0%. A large part of this difference is accounted for by inventory stocking, something I expect to subtract from growth in Q4 and Q1 2014. But the underlying rate of growth remains about 2%, above stall speed.

While all of this is positive, I have three caveats. First, jobless claims suggest US GDP growth has peaked. We saw what I believe will be cyclical low data in early Q4. I expect jobless claims to increase from here, and for the underlying rate of real GDP growth to decline accordingly. In October, I wrote that “we should expect the change in claims to mean-revert and GDP growth to slow. This is the mirror image of the data signals we saw in January 2009, when jobless claims were going to stratospheric levels.” This puts me at odds with most analysts who see accelerating growth on the back of jobs increases and capital spending growth.

Second, job and wage growth needs to pick up for the recovery to be sustainable. We are getting lower personal savings rates that I do not think are sustainable because they are fuelling consumption above wage gains that are only possible via an incipient releveraging that is now ongoing. If job and wage growth do pick up on the back of business spending, then I may need to change my view to fit the consensus view that sees accelerating US growth.

Third, housing data have been a tad weak of late. While sales of new homes exceeded forecasts in November, and housing inventory for sale is now in the normal range below 6 months’ sales, refinancing activity is weakening as interest rates climb. And the latest data on mortgage activity showed applications at a seasonally-adjusted 13-year low. These data points are perhaps blips; housing is still doing well overall, but the data are weakening a bit.

The bottom line here is that the US economy is growing well. There are a few weaknesses in the data. However, overall surprises are to the upside and this augurs well for 2014.