MONDAY SCOUTING REPORT: Is The Consumer Really Spending?


This post is part of the “Monday Scouting Report” series, a weekly look at the stories and issues that most affect mid-market businesses. “Monday Scouting Report” is sponsored by GE Capital.

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U.S. economic data has been coming in increasingly positive.Everything came to a crescendo on Friday when we learned that American companies added 236k jobs in February. This helped bring the unemployment rate down to 7.7 per cent from 7.9 per cent.

This week, the February retail sales report will tell us if Americans are actually spending.  This report will be crucial because it will incorporate a full month’s worth of the payroll tax hike.  It’ll also reflect any impact that the sequester debate may have had on consumer confidence.

Top Stories

  • Is the economy over the hump? Friday’s awesome jobs report helped lift the Dow Jones Industrial Average to an all-time high. And economists are getting increasingly optimistic.  “In our annual forecast rollout last November, we predicted that the US economy would move “over the hump” of fiscal contraction, with still-sluggish growth in most of 2013 followed by a gradual acceleration to an above-trend pace in late 2013 and 2014,” said Goldman Sachs’ Jan Hatzius. “But the recent data raise the tantalising prospect that the “hump” may already have occurred.”  Even Bill Gross, the bearish bond manager at PIMCO, cranked up his GDP forecast to 3 per cent.
  • The dollar is undergoing a major change. In recent years, stocks rallied when the dollar fell.  In recent weeks, that relationship has completely reversed. “This suggests that the USD is not being used as a funding currency to the same degree as previously, and is starting to display some of the characteristics of an asset currency,” write the currency analysts at Morgan Stanley. “This is consistent with the view that Fed policy stimulus is driving US asset markets, rather than broader risk appetite.” 

Economic Calendar

  • Retail Sales, Wednesday: ‘The retail sales report will be important for gauging the degree to which real GDP is bouncing back in Q1 after exaggerated weakness in Q4,” writes High Frequency Economics’ Jim O’Sullivan.  Economists expect retail sales growth of 0.5 per cent in February. The number is likely to be impacted by all of the negative talk surrounding the sequester budget cuts. This will become more clear in Friday’s University of Michigan Consumer Confidence report.
  • Inflation, Friday: Economists estimate that the consumer price index climbed by 0.5 per cent in February. “While core prices are modestly increasing, we do not expect runaway inflation as some are purporting,” writes Wells Fargo’s John Silvia. “Housing, which makes up about 40 per cent of core consumer prices, still has many obstacles to overcome and inflation expectations remain stable.” In December, the Federal Reserve said it would keep monetary policy loose while inflation is below a 2.5 per cent rate.
  • Industrial Production, Friday: Economists estimate that industrial production climbed by 0.5 per cent in February. Earlier this month, we learned the ISM Manufacturing index, a good preview of the industrial production report, unexpectedly climbed to 54.2 in February from last month’s reading of 53.1.  The ISM report was particularly surprising because economists were looking for a decline.

Market Update

The S&P 500 is very near an all-time high. As we mentioned above, there is some concern about the rally in the dollar.

But Deutsche Bank’s David Bianco believes we need not worry as price-earnings ratios (PE) rise. “It would take a very sharp dollar rally to derail EPS growth or cause oil prices to collapse, which we do not expect,” said Bianco.  “But gradual dollar strength, as we do expect, would be consistent with further improvement in US economy and fiscal position, which should help raise the PE.”

Ultimately, a strong dollar reflects an economy that is getting. It also means foreign investment dollars are coming in. Meanwhile, the dollar is moving at a moderate pace, which gives the stock market room to extend its rally.

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