Retail Sales: Canary Syndrome
We look at monthly retail sales as a mild slowing does not change the basic consumer resilience storyline.
The market justifiability is scouring economic releases for any hints of shifts in consumer behavior given that household consumption is the anchor that has kept the expansion theme steady.
June Retail Sales numbers showed a bit of a fade vs. expectations, but the line items still show pockets of strength with the propensity of consumers to spend still in evidence with a record number of consumers on payroll and a sense of confidence seen in many metrics across industries such as autos and homebuilding.
The Retail Sales miss vs. consensus estimate was tied to the category leader of Autos, but there is very little in the auto trade color to suggest weakening yet after recession-level volumes of 2022.
Retail sales missed guidance, but across the line items sequentially MoM and YoY are still encouraging in the context of the views held by many back in the fall of 2022 that “We are already in a recession.” As noted on the chart, Retail sales ex-Autos are tapering but still positive. Positive is as positive does.
We see some weakness among core retail line items but a healthy pop in the important Nonstore retail numbers with its heavy weighting. Autos ex-parts faded somewhat, but we remain positive on the direction of Auto demand. The ability to add incentives into the auto sales strategy if the FOMC gets uglier in 2H23 and OEM support of dealers via their captive units is a well-traveled road. Discount financing ends up a de facto marketing cost to the OEM.
Retail sales always gets a lot of attention and for very good reason since the consumer and the PCE line is over 2/3 of GDP (see 1Q23 GDP: Facts Matter 6-29-23 , GDP 1Q23: Devils and Details 4-27-23). We are of the school that you don’t have a recession without a contraction in Personal Consumption Expenditures (PCE) regardless of the headline GDP line when trade deficit numbers or inventory swings can push the headline into the negative zone (see 3Q22 GDP: It’s the Big Little Things 10-27-22). The performance of some bellwether cyclical industry equities and their guidance has been constructive coming out of 1Q23, and we will get a fresh round of inputs with the 2Q earnings season.
In terms of framing the monthly retail numbers, the bear vs. bull theme revolves heavily around when the consumer backs off from spending. That is the pivotal variable for 2H23 GDP performance. We get the advance read on 2Q23 GDP next week, and each line in Goods and Services will be getting handicapped with one eye on employment trends, which have held in well, and the other on inflation, which is declining.
The theories around how much purchasing power households will retain either through savings or a ready willingness to use credit are all over the market. Spending on travel and high air fares this summer have been smoking hot, so the question will be when they will pull back and by how much. Spending is high and so are payrolls and some lingering (even if lower) pent-up demand.
As we looked at in a recent commentary on systemic consumer debt exposure (see Consumer Debt in Systemic Context 7-13-23), the top-down view of consumer borrowing shows the current cycle for household debt as very solid vs. prior cycles. Rising financing costs for debt-financed purchases is a reality that cannot be ignored, but many households have locked in 3% area mortgages that helped materially boost household cash flow at a time payroll headcount is at records and real wage growth is at least positive (barely) in some pockets of the economy. Personal Income and Outlays is out next week for our next read on those indicators. Deflating energy costs were well timed in the summer peak driving season.
Overall, we would call these retail numbers reassuring since there is ample room to see steady demand in ecommerce and in the auto segment. Lower oil/gasoline prices are like a consumer tax cut, but that is always the least predictable X-factor in the mix. We have issues ahead such as strike risk at UPS and with the UAW in the fall, and those are major event risk factors to watch for fallout or for their distorting effect on the coming rounds of Retail Sales.
Contributor:
Kevin Chun, kevin@macro4micro.com