Consumer Confidence Spurs Retail Sales
In yesterday's post "Gallup: Consumer Spending Is Up - Retail Data Is Down" we discussed sentiment of consumers relative to their actions. Today, the advance monthly retail sales report showed a bump of .06% for May which exceeded economist's estimates. Econoday did a nice summary of the headline data:
"May retail sales surprised and increased 0.6 percent on the month and were up 4.3 percent from a year ago. Retail sales excluding just autos and excluding both autos and gasoline were up 0.3 percent from April pretty much as expected. On the year, they were up 2.8 percent and 4.1 percent respectively.
Most sales sub-categories were up on the month. Auto sales were up 1.8 percent, gaining for a second consecutive month after increasing 0.7 percent in April. Sales at gasoline stations edged down 0.2 percent thanks to declining prices. Elsewhere, furniture and home furnishing stores (down 0.8 percent), electronics & appliances (down 0.4 percent) and clothing & accessories (down 0.2 percent) were down on the month. All other categories advanced with building materials climbing 0.9 percent, food rising 0.7 percent and sporting goods increasing 0.6 percent."
There are some interesting points buried within that analysis. Automobile sales are up as auto manufacturers continue to stuff the dealer network channels, however, incentives for the dealers to actually sell those cars to consumers is now at the highest level in the past two years as margins are squeezed. As we discussed yesterday, with wages on the decline, it is interesting to see the most discretionary goods such as furniture, clothing and electronics falling for the month. The decline in gas prices helped somewhat but the increase in food, which is a much bigger percentage of the family budget rose sharply for the month.
The improvement in consumer confidence, which has been spurred by a surging stock market since the beginning of the year, has helped bolster retail sales currently. However, as always, while the current data point is certainly positive we must view it within the context of the overall trend to give the data meaning. The chart below shows the very defined downtrend in retail sales which clearly peaked in 2011. I have used a 3-month average of the annual rate of change to show rather volatile data more clearly.
(Important note: While the uptick in the retail sales data is a positive note; the volatility of the monthly data makes it very difficult to make any clear assessment about the real strength of the consumer or the economy. This is why I smooth the data to more clearly show the trend.)
It is clear that the sharp increase in consumer attitudes since the beginning of the year has finally translated into a nudge up in retail sales. However, in order for the increase in retail sales to translate to economic growth the advances must be sustainable.
Is The Consumer Really Back?
The question of the sustainability of increasing consumer demand is a key point of the domestic economy. Increased demand, above simple population growth, is the key to spur further employment gains, increased wages and stronger economic growth. This will also lend to increasing inflationary pressures from a cost-push standpoint.
As discussed yesterday wages remain under pressure and increased consumption has come at the expense of personal savings rates and increased consumer debt levels. As I stated:
"While consumers have shown an amazing ability to consume well beyond their means for many years by tapping cheap credit, turning their homes into ATM's and filing for governmental assistance; these sources are finite in nature. Eventually, if wages do not start to rise, full time employment doesn't increase and interest rates rise, consumers may quickly find the end of consumptive capabilities."
From an economic standpoint the increase in retail sales is certainly encouraging as it makes up roughly 40% of the overall Personal Consumption Expenditures (PCE) that feeds directly into the GDP analysis. However, it is also just as important to view the data from the standpoint of where the funds are being derived from. If the increases are a function of increased debt, sales gimmicks and lower personal savings rates - this is not healthy for economic growth longer term. Recent data from MasterCard directly addresses this issue (via Zerohedge):
Since the end of 2009, growth in U.S. consumer spending has been driven largely by luxury goods and consumer staples. The middle class has less disposable income (or access to credit) available for discretionary purchases.
The growth of U.S. retail spending (excluding autos) slowed from an annual average pace of 8 percent in 2011 to 5.1 percent in 2012. In the first five months of 2013, U.S. retail sales have been growing at an annual average pace of just 3.5 percent.
U.S. consumers have been cutting spending on electronics, air travel and gasoline since the beginning of the year. In contrast, sales of necessities such as groceries and baby clothes are robust.
U.S. spending on home furnishings and repairs continues to be robust, which suggests that the housing recovery still has some legs.
On the other hand, the surge in spending on auto maintenance means that people are reluctant to buy new cars, preferring instead to repair what they already own. Similarly, there has been a significant decline in auto parts sales since the end of 2012.
U.S. purchases of high-end jewelry have grown much more slowly than total retail spending. Moreover, high-end jewelry spending hasn't matched its peak in December 2007.
Consumption in Canada has been weaker than in the U.S. for several years despite a much healthier labor market. This might be explained by the slowdown in China and the contraction in commodity demand.
U.K. luxury spending seems to be at least partly driven by the prices of oil and natural gas. That suggests that wealthy Russians and Middle Easterners are a significant source of demand for high-end goods in British stores.
The U.S., U.K. and Canada have all experienced a surge in "staycations" as families avoid expensive travel in favor of simpler -- and cheaper -- pleasures at home.
Perhaps reflecting the global sell-off in commodities, spending on luxury goods in the U.K. has been declining from prior-year periods for the past six months. Growth in U.S. luxury spending has slower than total U.S. retail sales in the first few months of 2013.
MasterCard Advisors estimates that Canadian retail spending has only increased by 0.5 percent in the past 12 months. As recently as March, the 12-month change in consumer spending was actually negative.
While the media quickly proclaimed the May retail sales report as "the most important in years" it will only be important if it is sustainable going forward. For that to happen consumers must begin to see their standard of living really improving through full-time employment and higher wages. Increased demand is the key to push employers to hire and increase wages but they will be slow to act until there is a sustained increase in consumption. What happens over the next few months will be key to the ongoing economic recovery story.