By Lance Roberts, STA Wealth Management
While the specter of the debt ceiling debate continues to haunt the halls of Washington D.C. it is the state of retail sales that investors should be potentially focusing on. While the latest retail sales figures from the Bureau of Economic Analysis are unavailable due to the government shutdown; we can look at other data sources to derive the trend and direction of consuming spending as we head into the beginning of the biggest shopping periods of the year – Halloween, Thanks Giving (Black Friday) and Christmas.
I wanted to first turn to the ICSC-Goldman Sachs retail sales report. This weekly measure of comparable store sales at major retail chains, published by the International Council of Shopping Centers, is related to the general merchandise portion of retail sales. Since this is a weekly measure the raw data makes for a quite noisy chart therefore I have smoothed the data using a 3-month average of the annual rate of change to reveal the underlying trend as shown in the chart below.
As I have discussed in the past – economic strength appears to have peaked in early 2011. Since personal consumption expenditures makes up a little more than 68% of the current GDP calculation the weakening trend is retail consumption is the real culprit behind the sluggish economic growth.
However, since individuals can only consume with discretionary income, we can easily measure that capability by looking at the annual change in wages and salaries as compared to the ICSC retail survey. The wages and data salary is only available through August due to the government shutdown so the ICSC data implies that wages and salaries have weakened over the past month somewhat.
Lastly, I compared the ICSC survey with Gallup’s weekly U.S. Consumer Spending survey. Again, in order to smooth very volatile weekly data and get a comparative basis, I have used a 3-month moving average of the annual rate of change.
Notice that the two data are normally quite highly correlated with one another except for the rather abnormal surge in Gallup’s weekly survey at the beginning of 2013 even as the economy wrestled with the “fiscal cliff” debate. This surge can be attributed to the surge in incomes that occurred at the end of 2012 as companies rushed to pay out bonuses and dividends prior to the fear of increased tax rates.
However, after that brief anomaly, these trends have returned back towards a more normal correlation. The recent weakness in both surveys suggest that we may see a decline in the government retail sales and personal consumption data when they are eventually released as well.
What we are seeing in these weekly surveys have also shown up in some of the reported economic data as of late. Even the now “bullish” David Rosenberg noted in his daily missive:
“Even with the recent relief we have seen from lower mortgage rates and gasoline prices, the latest batch of economic news has been on the soft side. And that is a bit of an understatement.
U.S. auto sales in September fell to a five-month low (+2.3 YoY versus estimates closer to +3.3%). You know things can’t be too good when America’s youth stops buying denim jeans – the big downside surprise last week was the news that same store sales at GAP fell 3% last month. Sagging mortgage revenues [due to higher interest rates] at Wells Fargo and JPM (originations down 42% and 14% respectively from a year ago – don’t think that didn’t catch the eyes of the Federal Reserve as policymakers are focused sharply on the housing market) undercut their latest quarterly results.
And it’s not just the coincident economic indicators that have sputtered but there is now evidence of some fraying at the edges in some of the leading barometers – like the ECRI index which fell 1.7 points in the October 4th week to 130.4 which is down to mid-July levels…The economy sub-index of the Bloomberg Consumer Comfort Index also ticked down last week to its lowest level since March.
And it isn’t just the vagaries of the business cycle at play, but the negative supply-side dynamics that are holding the U.S. economy back.”
The recent downturns in consumer confidence and spending are likely being exacerbated by the controversy in Washington; but it is clear that the consumer was already feeling the pressure of the surge in interest rates, higher energy and food costs and stagnant wages. With the debates in Washington continuing to drag on it is likely that we will see more economic suppression in the months ahead. However, as we have repeatedly warned in the past, the level of economic strength isn’t sufficient enough to withstand the impact of a significant exogenous event – I specially stated back in January of this year:
“As stated above there is very little ‘wiggle room’ for the economy at this point to absorb much of a shock. With real final sales plugging along at 1.9% and the output gap above 6% the slack in the economy is huge. As a reminder these numbers are generally levels more associated with recessions and not four years into a recovery.
Of course, the fact the economy can run at such subpar growth rates without technically being in a recession is a function of the ‘new normal’ of an economy supported by trillions of dollars of stimulus. This also goes a long way to support the idea that recent claims that the economy is on the verge of an acceleration in growth are likely based more on ‘hope’ than ‘reality.’ The economy will likely continue to “muddle along” only as long as the Federal Reserve continues to support it by artificially suppressing interest rates and flooding the system with liquidity.”
As I have warned in the past – these divergences do not last forever and tend to end very badly. Of course, therein lies the ever present problem. It is one thing to understand and quantify the risk that exist but the timing of “the call” is something else entirely. As Howard Marks once stated; “Being early, even if you are right, is the same as being wrong.”