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What happened to the tax cut bump to economic growth? After expanding by a brisk 2.9 percent in the fourth quarter of last year and the 3.3 percent rate in the third quarter, the economy decelerated a bit in the first quarter to an annualized pace of 2.3 percent, consistent with good, not great growth.
Are American shoppers spent? That’s what it felt like when some of the nation’s big retailers released their earnings last week. Macy's reported disappointing sales and slashed its guidance for the year; Kohl's saw a surprising drop in comparable sales and logged its first slide in net sales in six quarters; Nordstrom’s results were impacted by lower-than-expected sales; and J.C. Penney also reported sales that were lower than expected. All of these stocks got clobbered, falling to multi-year lows and as a result, the department-stores group slumped 16 percent on the week. Those results put investors on edge, ahead of the government’s release of monthly retail sales. But then something miraculous happened: the report was better than expected! Sales were up a seasonally adjusted 1.3 percent, the largest increase in over a year. Even removing auto and gas sales, the numbers were good enough to prompt a number of economists to raise their estimates for second quarter growth.
So why did the stock market tumble, despite the seemingly good news? Perhaps it had something to do with a generalized anxiety about the ability for consumers to continue to spend without more robust wage gains. Although Americans have been willing to shell out big bucks for what they see as necessities (cars and technology), they have been far more prudent elsewhere, seeking bargains at discount chains.
The behavior is likely the result of the double whammy of two booms and busts (dot-com and housing/financial crisis) over the past 15 years. The toll on middle income Americans (defined as those earning $42,000 to $126,000 in 2014 dollars, for a household of three) has been enormous. According to a Pew Research Center report issued last December, middle-income Americans have fallen further behind financially in the new century. Adjusted for inflation the median income for a household of three fell from almost $83,500 in 1999 to just under $76,000 in 2014. Pew followed up that report with a new analysis, which found that from 2000 to 2014 the share of adults living in middle-income households fell in 203 of the 229 U.S. metropolitan areas.
With incomes dropping, consumers may be discovering something that behavioral economists have been discussing for some time: experiences pay greater dividends than things. When digging into the details of the retails sales report, it is clear that digital shopping continues to show strength, growing 10.2 percent on the year. But consumers are increasingly shifting away from goods and more towards services and experiences, like going out to dinner, taking vacations and purchasing premium media services.
MARKETS: Indexes continue to trade in a range, as investors bounce between optimism about the general direction of US growth and concerns that the rest of the world will eventually drag down the world’s largest economy with it. The broad market, as measured by the S&P 500, just barely remains in positive territory for the year.
THE WEEK AHEAD:
Mon 5/16:
8:30 Empire State Manufacturing Index
Tues 5/17:
Home Depot, TJX
8:30 Housing Starts
8:30 CPI
9:15 Industrial Production
10:00 E-Commerce Retail Sales
Weds 5/18:
Cisco, Target, Salesforce.com, Lowe’s
2:00 FOMC Minutes
Thursday 5/19:
Wal-Mart, Gap
8:30 Philly Fed Business Outlook Survey
8:30 Chicago Fed National Activity Index
10:00 Leading Indicators
Friday 5/20:
Campbell Soup, Deere
10:00 Existing Home Sales
Photo by Flickr User drinksmachine
Leap Day (Feb 29) occurs every four years, so will this year’s be more like 2012, when the US economy grew by 2.3 percent or the more ominous 2008, when it contracted by 0.3 percent? I’m guessing that it will be a 2012 kind of year. To recap, anxiety over a global growth slowdown, a precipitous slide in oil, an increasing US dollar and a potentially over-aggressive Federal Reserve has increased the recession chatter this year. The latest round occurred last week, after it was reported that world trade in 2015 dropped to the lowest level since the financial crisis, due in large part to the slump in China and other emerging economies.
Even with a slight revision higher, Q4 US growth was at a still-paltry 1 percent annualized pace, close enough to zero to make even the most ardent bull nervous. But according to economist Joel Naroff, “It is hard for the U.S. economy to fall into recession if the consumer is spending and guess what, that is happening. Consumption was strong in January and it was across the board. Solid gains were posted for durable and nondurable goods as well as services. More importantly, households can keep up the pace, as income growth was robust.”
There will be fresh data on the labor market, when the government releases the February employment report. The consensus sees an uptick in job creation to 185,000 from January’s lower than expected 151,000. The unemployment rate is likely to remain at 4.9 percent and with labor market conditions tightening (jobless claims remain low and job openings are high); hourly wages should rise by 2.6 percent from the prior year. If that’s the case, then consumers should keep spending at a moderate clip, which would help propel growth in the first quarter to at least a 2 percent annualized pace.
Despite the economy’s middling progress, it’s hard to see a widespread recession developing in the near term. As a reminder, the National Bureau of Economic Research's Business Cycle Dating Committee is the organization that keeps track of business cycles. While there is no fixed definition of economic activity, the Committee draws on various measures of broad activity, which Morgan Stanley has defined as “The Four D’s”:
MARKETS: US stock indexes have rallied more than 6 percent from their lows reached on Feb. 11, narrowing year-to-date declines.
THE WEEK AHEAD:
Mon 2/29:
9:45 Chicago PMI
Tues 3/1:
Dollar Tree
Motor Vehicle Sales
9:45 PMI Manufacturing Index
10:00 ISM Mfg Survey
10:00 Construction Spending
Weds 3/2:
8:15 ADP Private Jobs
Thursday 3/2:
Costco
8:30 Productivity and Costs
9:45 PMI Services Index
10:00 Factory Orders
10:00 ISM Non-Mfg Survey
Friday 3/3:
8:30 Feb Employment Report
What’s going on with the American consumer? Most economists thought that the plunge in energy prices would eventually show up in a little extra spending elsewhere in the economy. So far, that has not been the case. Retail sales in April were flat and excluding gasoline, they were up just 0.1 percent from March. People are not spending, because they are not buying that the economic recovery is for real. The University of Michigan’s consumer sentiment index dropped sharply, with respondents’ saying that they are still concerned about losing their jobs. In fact, they reported the highest probability of losing their jobs since 2009. The sour mood coincides with data showing that new jobless claims remain at 15-year lows.
And it’s not just in the U.S., says Capital Economics “consumers in advanced economies [US, euro zone, UK and Japan] have so far opted to save, rather than spend, their oil windfall.” All is not lost, because there is hope that as labor markets strengthen, confidence and spending should follow. Additionally Joel Naroff of Naroff Economic Advisors reminds us that the retail sales report does “not include services, which is two-thirds of spending, so we really cannot count the consumer out just yet.”
In addition to consumer spending, which is expected to spring back in the coming months, hopes are high for continued housing market gains. For much of the recovery, potential first time homebuyers were opting for rentals due to a combination of outstanding student loan debt, difficulty in obtaining mortgages and a generalized fear of owning a home. The later two issues appear to be dissipating (home purchase mortgage applications increased to a two-year high in April), especially as rents rise in many of the cities where young, first time buyers live.
Unfortunately, outstanding student loans could continue to partially impede progress in the housing market. Just in time for college graduation season, the New York Federal Reserve reported that total outstanding student loan debt increased to 1.2 trillion in the first quarter, up $78 billion from a year ago. Additionally, the college class of 2015 holds a dubious distinction: its graduates are the most indebted ever. The average graduate, with a student-loan, owes just over $35,000, according to Edvisors. Adjusted for inflation, that’s more than double the amount borrowers had two decades ago.
MARKETS: Consumer confidence may be down, but that hasn't stopped investors from pushing up stocks at or near record levels.
THE WEEK AHEAD: Traders are eagerly awaiting a long weekend-most will focus on minutes from the last Fed policy meeting and earnings reports from some of the nation’s largest retailers.
Mon 5/18:
Urban Outfitters
10:00 Housing Market Index
Tues 5/19:
Home Depot, TJX, Wal-Mart
8:30 Housing Starts
Weds 5/20:
Lowes, Sears, Staples, Target
2:00 FOMC Minutes
Thurs 5/21:
Aeropostale, Best Buy, Dollar Tree, Gap
10:00 Philly Fed
10:00 Existing Home Sales
Fri 5/22:
Ann Taylor, Foot Locker
8:30 Consumer Price Index
American consumers: start your engines! This weekend kicks off the holiday shopping season and with just 33 days to go before Christmas, retailers and economists alike have visions of sugarplums dancing in their heads. Back in October, the National Retail Foundation predicted holiday sales in November and December (excluding autos, gas and restaurant sales) would increase 4.1 percent to $616.9 billion, a full percentage point higher than 2013’s actual 3.1 percent increase during that same time frame and above the 2.9 percent growth over the past 10 years.
Other estimates have been similarly upbeat. Deloitte’s annual holiday forecast suggests sales will increase 4 to 4.5 percent, boosted by a 13 percent increase in consumer spending across all categories to $1,299 this holiday season. Analysts at Morgan Stanley believe that it will be a jolly holiday season, helped by an increase in personal income and wilder availability of credit. And research from Capital Economics shows that with employment rising and a fall in gas prices boosting real incomes, “this holiday shopping season could be the best in nine years”.
Regardless of the actual results, what is clear is that the nature of the holiday season is changing. NRF notes that holiday sales represent approximately 19.2 percent of the industry’s annual sales of $3.2 trillion, but for some retailers, the two-month season can account for almost 40 percent of total annual revenues. Perhaps that is why so many big names have extended the season by opening on Thanksgiving Day and even earlier - Wal-Mart started its holiday promotions last Friday!
With a full week to shop, the influence of Black Friday and Cyber Monday are expected to wane. That said, digital is where the growth lies. Shop.org expects 2014 online holiday sales to increase between 8 and 11 percent over last holiday season to as much as $105 billion. But that’s not the whole story: Deloite found that 50 percent of in-store retail sales, or $345 billion, will be influenced by digital interactions this holiday season.
For those inclined to get a jump on shopping, research from Adobe Digital has found that online prices will hit rock bottom on Thanksgiving Day, where consumers will see an average discount of 24 percent. (The average item will be 20 percent off during Thanksgiving week; prices will increase the Tuesday after Cyber Monday.) The second best day to shop online is the Monday before Thanksgiving.
Finally, despite the pain of the past credit bubble bursting, Americans are still willing to go into hock during the holiday season. According to a survey commissioned by NerdWallet and conducted by Harris Poll, families with household incomes between $50,000 and $75,000 will take an average of 2.6 months to pay off holiday debt, whereas families with household incomes below $50,000 will take an average of 2 months.
MARKETS: Stocks reached a milestone last week: For the first time since the dotcom bubble (14 years), the S&P 500 hit a new all-time, inflation-adjusted high.
THE WEEK AHEAD: Despite the Thanksgiving holiday, it will be a big week for economic data.
Mon 11/24:
8:30 Chicago Fed National Activity Index
10:30 Dallas Fed Manufacturing Survey
Tues 11/25:
8:30 Q3 GDP – 2nd Estimate (Initial reading: +3.5%)
9:00 Case-Schiller Home Price Index
10:00 Consumer Confidence
Weds 11/26:
8:30 Weekly Claims
8:30 Durable Goods Orders
8:30 Personal Income and Spending
9:55 Consumer Sentiment
10:00 New Home Sales
Thurs 11/28: Thanksgiving Day: ALL US Markets closed
The OPEC oil cartel meets in Vienna: Most experts say that even if the group were to agree on an export cut, it is unlikely to have a meaningful effect on prices, due to increased production by non-members
Fri 11/29: Black Friday
1:00 US markets close early
