- The details of the most recent report on US retail sales show that consumer spending – the economy’s biggest driver – is not as resilient as it seems on the surface, according to David Rosenberg.
- In an op-ed for Business Insider, the Gluskin Sheff chief economist laid out the most concerning areas.
- Visit Business Insider’s homepage for more stories.
That’s me in the corner
That’s me in the spotlight
Losing my resilience
US retail sales edged up 0.3% in October, which didn’t even fully offset the decline in September. Interestingly, if the 3.8% plunge in unit auto sales reported by the dealers had been included in the Commerce Department report instead of the inflated 0.5% estimate, guess what? The headline would have cratered 0.6%. That would have caused some eyebrows to be raised, don’t you think? Maybe not.
Practically everyone seems to be in a state of denial these days because they are falling into this trap of extrapolating the message from the stock market to the real economy, even though the correlation of the two broke down years ago.
In real terms, sales volumes dropped 0.1% in October following a 0.4% falloff the prior month. We have not seen such back-to-back weakness since January. And the negative (-0.6% at an annual rate) ‘build in’ for Q4 has only been this way seven times this cycle and consumer spending growth weakened markedly on six occasions. What if the recession is starting now and the markets are as clued out today as they were when it also started at the tail end of the fourth quarter of 2007?
The bond-induced backup in mortgage rates has snuffed out any semblance of a recovery in housing because anything in the retail sales report that touches the residential real estate sector retreated in October:
- Building materials slipped 0.5%, and this follows a 1.8% turndown in September; the YoY trend is -2.0%.
- Furniture dropped 0.9% in the first setback since June and sharpest decline since May 2018.
- Electronics/appliances declined 0.4% and has been flat or down in each of the past three months – the YoY trend is ensconced in negative territory at -3.4%.
Other retail segments are slowing
Restaurant sales deflated 0.3% for the first decline since December. The three-month trend has throttled back from over a 10% annualized pace in May, June, and July to just 2.3% currently, so there has indeed been a very sudden shift in consumers’ eating patterns. Keep in mind that this segment of retail sales has a 99% correlation to all sales activity – once dining out is out, it’s lights out for the rest of the cyclically sensitive consumer-spending space.
Sporting goods stores posted a 0.8% sales slide, which is the fourth straight negative reading. Another discretionary spending area coming under the household budgetary hatchet. The YoY trend here is flat.
Clothing sales sagged 1% in October and have fallen hard now in two of the past three months. On a year-over-year basis, sales are down 2.7%.
Why is that important? Because of all the retail sales segments, apparel has the tightest statistical link to the employment cycle – a 92% correlation, in fact. Who needs a suit, tie and new shoes if the interviews are drying up, as the latest JOLTS data are signalling in terms of shrinking job opening levels.
What did well in October were groceries (+0.4%) and gasoline (+1.1%). Department stores did eke out a small 0.1% gain, but in the context of a huge 1.5% plunge in September and an almost equally huge 1.3% tumble in August. Online sales are hot, with a 0.9% spike in October pushing the YoY trend up to nearly 15%, or about 4x as strong as the rest of the retail sales space.
It’s never a very pro-cyclical sign when eating out is out and eating in is in. But that’s where we are. At least dad is going to be in the kitchen with the apron on, cooking up that mac & cheese for the kids. And nothing wrong with playing some shinny with old hockey sticks and nets, much to the chagrin of the sporting goods stores. Ditto for clothing – just layer on that old Montreal Canadiens sweater. The contours of the retail sales data definitely were one of a return to frugality.
The jobs market is ‘no longer that strong either’
This is what I mean. People just listen to all the bafflegab that is put in front of them. Sorry, but no, consumer balance sheets are not in good shape – only by the standards of the 2006-07 credit market bubble peak, but that’s it.
And no, the jobs market is no longer that strong either, and the BLS data are being distorted by the fact that in the past six months, half the payroll gains are being totally made up out of thin air from the ‘Birth-Death’ model – even as we see that applications and actual formation of new business have started to contract.
Not to mention, the ridiculous commentary we have to put up with as well from the “ultra low” initial jobless claims data. This is a very misleading data-point and sadly it is part of the Conference Board’s leading economic indicator (then again, so is the stock market!).
The reason for lower initial jobless claims, at a time when the JOLTS numbers are signalling an increase in layoffs in recent months, has nothing to do with the economy. But it has everything to do with structural changes to the program, namely tighter state eligibility rules. The number of people receiving benefits is 28% lower now than it was in 2000 when the labour market was similarly as “tight” as it is today.
The thing economists are not taking into account in their commentary is that when the Great Recession ended a decade ago, many state legislatures reduced their unemployment benefits and tightened up on usage requirements. At least ten states reduced the duration of the payouts, several (at least five, anyway) adopted stricter work-search stipulations, and many just cut back on the dollar level of the benefits allowed.
Recession risks have not faded
The bottom line is that the low level of claims may only be telling us that there are fewer applicants because they have run out of their eligibility for state benefits and little else. It likely isn’t the reliable indicator it used to be.
I recall my chief strategist buddy and former Merrill colleague Rich Bernstein saying many years ago that claims were his favourite leading barometer…something tells me that has changed, and for good reason. Focus on the JOLTS report instead.
This alleged ‘solid’ labour market, my friends, managed to generate a 0.1% dip in real average weekly earnings in October and that followed a flat September. So, if this is what a ‘resilient’ jobs market generates in terms of inflation-adjusted work-based pay, imagine what happens when it turns just slightly less ‘resilient’.
Bottom line here is that the consumer is losing its resilience.
The lags from the downturn in the other 30% of the economy are starting to percolate.
Consumer confidence is high, indeed, but has faltered for three months running. And this is showing through in consumer spending patterns because cyclically-sensitive retail sales dipped ever so slightly in October and came atop a 0.3% retrenchment in September. The YoY trend in this metric that relates to spending on everything except essentials – what you want, not what you need – has slowed materially from almost 5% in mid-2019 to just 2% as of now. Strip out whatever inflation there is, and you’re talking about zero growth on cyclically-oriented consumer expenditures.
And recession risks have faded? Seriously?
David Rosenberg is a chief economist and strategist at Gluskin Sheff, the previous chief North America economist at Merrill Lynch, and the author of the daily economic report “Breakfast with Dave.” Follow him on Twitter @EconguyRosie.
Read the original article on Gluskin Sheff. Copyright 2019.
Business Insider Emails & Alerts
Site highlights each day to your inbox.