In April, US retail sales were flat.
This was a big disappointment and served as just the latest economic data point to fall short of expectations this year.
And now, some people are starting to use the word “recession.”
In a quick email following the retail sales report, a bond trader passed us a comment that read: “Retail Sales is very disappointing. It looks like the US is perhaps entering another recession. Again, its hard to blame this data on poor weather conditions. Fed on hold for the balance of the year is my call.”
And while bond traders aren’t economists, we highlight this comment because it illustrates in a great way something people “know” is true, but can’t quite put their finger on: consensus.
Right now, the bond market, and to a lesser extent the stock market, is betting that yields will continue to fall, or at least not rise precipitously. And considering that the bond market has more or less been in a bull market — bonds gain in price when yields fall — for the last 40 or so years, this has been a profitable trade, one that traders are loath to abandon.
Of course, there are always pullbacks, and the violent action seen in Treasuries and German Bunds, among other fixed income assets, has been a reminder of how quick things can turn.
But overall, there is a generation of bond traders that are going to need more convincing that the economy is getting way better, not just a negligibly so, for the Fed to do anything other than act cautiously.
Looking again, though, at this comment (“Retail Sales is very disappointing. It looks like the US is perhaps entering another recession. Again, its hard to blame this data on poor weather conditions. Fed on hold for the balance of the year is my call.”), we find that there are a few things going on here.
- First, the US economy grew just 0.2% in the first quarter, and since that initial estimate, it has started to look like the economy actually contracted in the first quarter, according to some measures.
- Second, economists have been quick to cite factors like the weather to excuse or explain worse-than-expected data. Consensus in the economic community is that overall, the US economy is still steadily repairing itself from the financial crisis, and while growth isn’t robust, the risks of a recession aren’t seen as imminent. Corporate profits are still high, job growth is still solid, and particularly after the first quarter of 2014 saw a sharp economic contraction followed by expansion, economists have been quick to dismiss a similar pattern this year as being anything more than a blip.
- Third, the Federal Reserve has indicated time and again that it will “likely” be appropriate to raise interest rates this year. The Fed hasn’t raised rates since July 2006, and rates have been pegged near 0% since December 2008. And while the economy has gotten better since the recession, many don’t think that the Fed will raise rates in the face of an economy that is just barely growing, let alone falling into recession.
There is always discussion from those in the market and those who are actually economists about what any one piece, or collection of pieces, of economic data “means.”
Certainly, economists will have their own view on what Wednesday’s retail data set “means,” which may or may not conflict with this one trader’s view.