Broad-Based Retail Weakness Despite Scant Gain
Some reports tell you everything in the headline, today’s retail sales report for August is not one of them. Yes the headline increase of 0.1% was better than the modest drop that had been expected. You can thank a smaller-than-expected drop in motor vehicle sales for that. The ex-autos line tells us more about the present state of the consumer after setting aside that big-ticket category, and here we find that sales inched only incrementally (+0.1%) higher in August.
U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Economics
There is fodder for multiple narratives in today’s retail sales report. Think consumers are finally tapped out? There is no shortage of categories in decline in August. General merchandise stores were down 0.3%, led lower by a 1.1% drop in sales at department stores. That is not what these retailers were hoping for in a key back-to-school month. Speaking of which, clothing stores were also down 0.7%. Furniture stores gave back most of the pick-up seen in July, and electronics and appliance stores saw sales fall 1.1% in August. Even food & beverage stores posted decline in August.
With that kind of broad-based weakness, the case for the unstoppable consumer is surely weakened, so how do you get a headline gain? One word answer: Ecommerce. The non-store retailer category that includes online spending is second only to autos in terms of dollars spent, and it rose a stout 1.4% in August. With some help from increased spending at drugstores and other smaller categories that explains the scant headline gain.
Source: U.S. Department of Commerce and Wells Fargo Economics
There are competing narratives about the state of the consumer at this stage of the cycle in which the Fed is poised to finally deliver on long-expected rate cuts. The question isn’t will the Fed cut rates at the conclusion of tomorrow’s monetary policy meeting, but by how much. Market participants have been parsing through each data release in recent weeks seeking the one that settles the debate. Retail sales did little to crystalize the degree of easing.
The deterioration in the labor market argues for Fed easing, yet many measures of growth demonstrate the economy is continuing to expand, including retail. But that divergence perfectly describes why this easing cycle is different and so hard to predict. Historically when the Fed starts to cut rates the economy is already in serious trouble. There are only few historic-references in which a Fed achieves the type of “soft landing” many anticipate today. The consumer may technically be unstoppable, but in recent months spending has undeniably slowed sharply. For policymakers already aware of the need to make the policy environment less restrictive, this weakening may encourage the Fed to deliver a larger cut to initiate its easing cycle.
Source: U.S. Department of Commerce and Wells Fargo Economics
Seven categories of retailers reported declines in sales last month and a pullback in some discretionary-like categories demonstrates choosier consumer behavior. Nothing in this report says everything is fine, spending has slowed. But at the same time the data don’t scream dramatic pullback in spending consistent with recession.
The retail sales data position for some upside risk to Q3 consumer spending. Control group sales, which exclude autos, gasoline, building materials and restaurants rose 0.3% in August amid upward revisions to prior months. These data feed directly into real personal consumption expenditures in GDP and position for slightly stronger goods spending that we had anticipated previously.
Some analysis tell you everything in the headline, Wells Fargo’s analysis for August is not one of them.
- Counting the number of categories in decline is rather superficial. Nonstore, miscellaneous and health care retailers, 24% of all sales and 30% of non-food-non-gas, grew their sales 1.3% MoM in August, that’s 16% a.r.!
- Control sales (ex-autos, gasoline, and building materials), which directly feed into GDP, rose 0.3% after +0.4% in July. That’s 4.3% a.r..
- My retail inflation proxy was flat again MoM in August. YoY it was –0.9% in August after +0.2% in June and July and +2.2% in September 2023. Retail inflation has thus declined 3 full percentage points in one year while nominal sales growth slowed only 2 pp. Real sales growth accelerated from +1.4% to +3.0% in the past year.
- Indeed, real expenditures on durable goods were up 3.4% YoY in July and real nondurables were up 1.7%. The combination was up 2.4% in July vs 2.56% one year ago. The chart below shows how close my real retail sales data is with real spending on goods. The black line is real services. All spending categories are in the 3.0% range in August.
BTW, the Atlanta Fed GDPNow estimate for Q3 rose from 2.5% to 3.0%. “The nowcast of third-quarter real personal consumption expenditures growth increased from 3.5 percent to 3.7 percent.” Goldman Sachs’ tracking is now at 2.8%.
Inflation in Canada Hits 2% Target for First Time Since 2021 Core measures decreased to average of 2.35% year-on-year
The consumer price index rose 2% in August from a year ago, following a 2.5% increase a month earlier, Statistics Canada reported Tuesday in Ottawa. That’s slower than the median estimate of 2.1% in a Bloomberg survey of economists. (…)
Excluding food and energy, the index rose 2.4% from a year ago. Services inflation rose 4.3%, while goods fell 0.7%. (…)
The inflation print is the first of two reports before the Bank of Canada’s next rate decision on Oct. 23. After the release of the data, traders in overnight swaps upped their bets for a larger-than-normal reduction at that decision, putting the odds of a 50-basis point cut at just over a coin flip. (…)
On a monthly basis, the index fell 0.2%, versus expectations for a flat reading, and rose 0.1% on a seasonally adjusted basis. (…)
Prices declined in five of eight subsectors on a monthly basis, which could trigger worries about deflation among central bank officials if it becomes a trend. Macklem has recently said the bank cares as much about undershooting the 2% inflation target as it does overshooting it. (…)
Earlier this month, Macklem reiterated that officials may cut rates by 50 basis points or more if inflation and the economy slowed faster than expected. (…)
Markets expect rates in Canada to fall to about 2.5% by July of next year — more than 50 basis points lower than they were pricing a month ago. (…)
The first Fed rate cut
(…) The last three cuts after a hiking cycle all preceded devastating bear markets. Before that, there was no real pattern. There was no discernable difference in returns based on how far the S&P 500 was from a multi-year high at the time of the first cut.
The table of maximum risk and reward across time frames shows a pretty binary result. Over the next year, stocks either enjoyed decent gains with low risk or limited gains with high risk. There wasn’t any middle ground. A decent heuristic was watching the next two weeks – if risk exceeded reward, then it was a strong suggestion that the following year would be tough. (…)
Opinions aside, the imminent cut in the Fed Funds rate has been a crap shoot for investors. There was no consistent pattern in forward returns after significant hiking cycles. The last few have been major warning signs, while most of the others were not at all. They were more consistently negative for the dollar (for a while), tech stocks (ironically enough), while being good for Treasury notes and bonds, value stocks, and defensive sectors.
