Recent retail sales data are well below expectations and probably an indication that consumers have become more cautious about spending.
Financial conditions matter greatly, and the recent tightening is likely having some impact on housing activity and consumer attitudes.
Spending follows wages and it will be difficult for retail spending to gain much traction with the tie to shallow compensation trends.
The best one can say about consumer spending data is that it is not getting any weaker. Much of the credit is given to solid demand for autos which accounted for about half the gain in August’s rather middling 0.2% rise in retail sales. Absent autos, retail sales edged up a small 0.1%, well below expectations and probably an indication that consumers have become more cautious about spending with interest rates leaping higher. Generally, spending trends remain in place with only some modest deceleration. Core retail sales (ex-autos, building materials and gas station sales) serves as a proxy for personal consumption in GDP, and this rose a puny 0.2% in August, the smallest gain in ten months and well below the usual 0.4% gain typically seen. In the last year, this is up 3.5% but only 1.6% after inflation. However, this does not include any measure for spending on services, which has been very weak this year. As a result, real personal consumption expenditure (PCE) shows no sign of accelerating and will likely print close to recent trends of between 1.5% and 2.0%.
On the plus side, auto sales is a continuing bright spot (+1%), and manufacturing activity is helping stabilize growth. In the details of the retail sales report, the housing-related sectors were mixed with weaker Building materials (-0.9%) but improved furniture (+0.9%) and electronics (0.8%). Discretionary sectors were mostly disappointing, with declines in clothing and general merchandise. The consumer does appear to be hesitating, and these are the categories cut first from the budget.
In other news this week, the preliminary read on consumer sentiment for September saw its biggest drop this year, falling to 76.8. It is now back below the key 80 support level that lines up with consumer’s views of an improving economy. Mortgage rates continue to move higher with the effective rate on a 30-year mortgage now at 4.93%, the highest in over two years. And mortgage applications continue to plummet, down 14% last week and down a sizable 55% versus a year ago. Applications for refinancing have dropped 54% in just the last three months. Up until recently, refinancing activity was lowering mortgage payments and helping consumer pocketbooks, but this has come to a halt. Financial conditions matter greatly, and the recent tightening is likely having some impact on housing activity and consumer attitudes.
Finally, consumer borrowing data was released. Non-revolving credit, particularly that used for auto purchases, saw healthy gains and is up 4% year over year. But revolving credit shrank for the second month in a row and has barely risen in a year. Consumers appear to feel this is no longer a resource to supplement spending. With the continued reluctance to use credit and little ability to tap into home equity to support spending, wages are a key determinant this cycle for consumer spending. Some cushion has been found by reducing savings, but this has limits, particularly with savings rates now very low. Spending follows wages and it will be difficult for retail spending to gain much traction with the tie to shallow compensation trends. The chart below reflects this link (ignoring the impact of the year end spike that pulled forward income to escape higher taxes).
Source: Columbia Management Investment Advisers, LLC
Do not expect the consumer to pull the economy out of the slow growth mode soon. The coming modest improvement in growth metrics will come outside of the consumer, primarily due to less fiscal drag and steadier business and global demand.