Trends in employment (+2.0% YoY), working hours (0.0%), and hourly wages (+2.5%) together provide a good proxy for current labor income growth of around +4.5% YoY. With overall inflation at zero, real labor income growth is also around +4.5% YoY. The savings rate in Q3 was unchanged from last year. Gas prices are down more than $1/gallon (-30%) from last year and food-at-home inflation is a low +0.8% YoY.
Why is it then that discretionary spending looks so weak? Has the U.S. consumer, always so ready to fulfill his/her patriotic shop-and-spend obligation changed so much? Even as we approach the annual pilgrimages to the malls? Where’s Waldo the American consumer?
Understanding and analysing retail sales has become tricky given the many cross-currents within the retail trade (e.g. on-line growth, market share shifts) and the high divergences in inflation trends by categories due to falling commodity prices and the rising dollar. Seasonal adjustments have also become suspect given the recent wide fluctuations in the economy and the weather.
This is some of the stuff that you might have read from the various analysis of Friday’s retail sales report:
- Consumer spending at retailers climbed just 1.7% since October 2014, compared with a 4.7% annual increase the year before that.
- Following a 0.1% dip in September, ‘control group’ retail sales rose just 0.2% (half the expected 0.4% rise).
- Retail and Food service sales ex-gasoline increased by 4.1% on a YoY basis (1.7% for all retail sales including gasoline).
- Excluding motor vehicles, sales were up 0.2% in October. And excluding gasoline, sales rose 0.1%. When excluding both categories, sales were up 0.3% last month and a healthy 3.5% from a year earlier.
- Core sales, the figures that are used to calculate gross domestic product and which exclude categories such as autos, gasoline stations and building materials, climbed 0.2 percent last month, less than the 0.4 percent median forecast of economists surveyed by Bloomberg. The readings for September were revised up to show a 0.1 percent gain compared with a previously recorded 0.1 percent drop.
- Falling gasoline and food prices probably also restrained the core readings. Sales at general merchandise stores, which include warehouse big-box merchants that also sell gasoline, fell 0.4 percent. Grocery stores, which typically see receipts rise, saw a 0.3 percent decrease.
- The rate of purchases last month was also held back by a 0.5 percent decrease at auto dealers.
- Sales at nonstore retailers jumped 1.4% last month, and are up 7.1% from a year ago, the strongest of any retail category. That helped keep the overall sales figure in positive territory in October from a month earlier, up 0.1%, despite a 0.5% slump in auto sales and parts—even as unit sales of cars rose—and a 0.9% decline at gas stations.
- Large retail chains, including Macy’s Inc. and Nordstrom Inc., warned this week of an unexpected slowdown in spending at their stores. Their disappointing performance sent shares of major retailers tumbling.
- Nordstrom executives were at a loss to explain a sudden deceleration in sales that began in August and continued through October. “We’ve got less people buying clothes this quarter than we expected, and there’s really nothing else to point to,” Jamie Nordstrom, the company’s president of stores said on a conference call Thursday.
Nordstrom said its business slowed across all regions, categories and channels, including online, where it had been growing strongly. The slump forced the company to discount more than usual to clear unsold goods.
And the clincher which scared many:
- The Last Two Times Retail Sales Were This Bad, The US Was In A Recession.
In the confusion, the S&P 500’s consumer-discretionary sector, which includes several retailers, was the biggest decliner on Friday with a loss of 2.7%. The sector fell 4.6% for the week, its largest loss since late August. The S&P Retail Sector ETF is down almost 9% in the last 8 days. That is the fastest collapse in this bellwether industry since August 2011.
Let’s look at this in a dispassionate, organized way using YoY rates of change to avoid the more iffy seasonal adjustments and applying specific inflation measures to get a better read of volume trends:
- Discretionary spending is +4.7% in October, +4.6% last 3 months with apparent inflation +1.0%. Apparent volume is thus +3.6%.
- Car sales are +6.2%, +6.6% last 3 months, virtually no inflation. Apparent volume +6.1%.
- Housing-related spending is in the +4.0-6.0% range in real terms.
- “Other goods” may look weak until we understand that their wares are generally deflating.
- Even apparel looks better when considering declining prices and unseasonal weather.
- Restaurant sales are strong.
In all, these are no recessionary data, quite the opposite in fact.
Then we have the “general merchants” which include department stores. Their nominal sales are up only 1.6% when “CPI ex-food, shelter and energy” is up 1.0% and CPI-apparel is –1.4%. Hard to say what volume is but it is not negative in my view. The fact is that these big department stores, from Nordstrom to Sears to Walmart, are dinosaurs trying to survive in a rapidly changing world.The whole specie is getting killed by the “non-store retailers” and the shrewd discounters such as TJX. Those still able to fight are mainly trying (able) to eat their congeners.
Investors were rattled by Macy’s –3.9% same-store-sales in Q3 but that came after -2.1% in Q2 and -0.7% in Q1. Why the surprise? This followed lackluster WMT sales trends which are also primarily company specific problems.
Meanwhile, JC Penney, not such a terrific merchant but with new leadership, rang sss of +6.4% in Q3, +4.1% in Q2 and +3.4% in Q1. And even with slow traffic in recent months, Nordstrom was able to get +3.5% sss growth in Q3. With goods inflation generally negative, volume is pretty decent.
Amazon’s North American revenues grew 28% YoY in Q3 after +25% in Q2 and +24% in Q1. Quarterly growth averaged 23% in 2014. Costco U.S. comps are up 4% YoY ex-gazoline and FX in October and +6% in September-October. During Costco’s fourth quarter ended in August, comps were also up 6%, as for all of its F2015. No slowdown there and no recessionary trends there as well. Amazon and Costco are not hot newcomers with low sales base.
Waldo is clearly shopping and spending but he’s seemingly tough to find in “dinostores”.
This CalculatedRisk’s chart that simply ex-outs sharply deflating gasoline sales is a good reflection of the actual, meaningful trends, especially if you consider that inflation is close to zero or even negative on core goods:
Gallup‘s November update of Americans’ 2015 holiday spending intentions finds U.S. adults planning to spend $830 on Christmas gifts this year, on average. That is up sharply from the $720 recorded a year ago, and is significantly higher than what consumers have indicated in any November since 2007.
Gallup’s initial measure of 2015 holiday spending plans, conducted in October, also showed consumers poised to splurge this Christmas, as that month’s $812 average spending figure was the highest Gallup had seen in any October since 2007. The consistency between the two months is a bit unusual, as Gallup typically finds Americans scaling back their spending plans between October and November.
According to Gallup’s modeling of how prior years’ spending forecasts compare with the final November-December retail sales figures for each year, Americans’ latest Christmas spending data point to an estimated increase of between 5.1% and 5.8% in U.S. holiday retail sales.
If Waldo carries on spending, the inventory glut will quickly disappear and the manufacturing sector will soon see rising orders and production, much to the surprise of the doomsayers.
We now have 92% of Q3 earnings in and Consumer Discretionary companies are expected to show EPS growth of 14.7% in Q3, up from +11.4% expected on October 1 and better than the +12.5% recorded in Q2.
In total, S&P 500 companies are on track to register Q3 EPS of $30.05 vs $30.04 in Q3’14 in spite of all the headwinds encountered (see “Questions” within the Nov. 10 New$ & View$). Mid-quarter, pre-announcements for Q4 earnings are positive for 23 companies vs 18 at the same time last year and negative for 66 companies (68 last year). So far, so good.
Factset calculates that ex-Energy, S&P 500 EPs would be up 5.0% in Q3 on revenues rising +1.1%. Margins are not contracting just yet.
If the Energy sector is excluded from the growth calculations for Q4 2015, the estimated earnings growth rate for the quarter would be 1.6%, and the estimated revenue growth rate would be 1.2%. If the Energy sector is excluded from the growth calculations for CY 2015, the estimated earnings growth rate for the year would be 6.9%, and the estimated revenue growth rate would be 1.9%.
At the end of Q3, trailing 12-month EPS are $119.28, up 0.4% from 2014 EPS even with Energy down some 60% and Materials down 5%. The big drag from Energy will peak in Q4 and completely end in Q2 if current estimates are right.
At 2025, the S&P 500 is selling at 17x TTM EPS and 18.9x on the Rule of 20 scale. Upside to fair value of 2157 is 6.5%. Downside to the two recent lows of 17.8x (1900) would be –6.2%.