Amid the market’s run to new record highs this week, hopes were high that the April retail sales report would confirm that the recent economic stalling was weather related. Now that the snow has melted, all’s well again. Wallets will open. Shoppers will hit the malls. Money will flow. Right?
The April retail sales report was a bit of a downer. And when combined with a concerning drop in the personal savings rate as well as the ho-hum pace of income gains and signs of bubbling inflationary pressure (particularly in food and rent), it all suggests the U.S. consumer is suffering more than Wall Street realizes.
First, let’s talk the retail sales report.
Core retail sales (removing autos and gas) dropped -0.1% month-over-month, a big drop from the 1.4% growth seen in March. That returns to the soft pace seen over the winter: The January core retail sales report featured a 0.7% drop and averaged -0.1% between November and January, a normally busy season for shopping.
According to the team at Capital Economics, the weak report “gets the second quarter off to a soft start and suggests that real consumption growth in the quarter as a whole may be a big weaker than we previously expected.” Macroeconomic Advisors, which is looking for Q1 GDP growth to be downwardly revised to -0.7%, is now looking for a 3.7% rebound for Q2.
The problem isn’t just the winter weather (although that clearly played a role), it’s that middle class pocket books are stretched too thin. You can see this in the way the personal savings rate dropped to just 3.8% in April, down from 6.4% in 2011 that marketed the top of the post-recession recovery in household savings. We’ve seen a steady decline in the savings rate since then despite the ongoing economic expansion.
Similar dynamics of reduced savings and increased reliance on credit were seen in the last two market cycle (late 1990s and mid-2000s). What’s different this time is that the wealth effect of higher stock prices and home prices, which lifted consumers during those last two cycles, isn’t as potent anymore. Home prices nationally remain 20% off of their July 2006 housing bubble peak. Stock ownership has been in decline according to Gallup polling.
It’s also worrisome to see households turning to credit to fuel this diminished level of spending. The New York Federal Reserve’s Quarterly Report on Household Debt and Credit showed that households increased their debt load by $129 billion in the first quarter, up about 1.1%. The most recent uptick has been driven by credit card debt as mortgages and auto loans cool off. To me, that suggests budgets are being squeezed.
The problem remains stagnant wages when adjusted for inflation, which after a three-year reprieve is poised to cause problems again. Food prices are rising at nearly a 2% annual rate. Housing costs are rising at a 2.7% annual rate. Yet inflation-adjusted disposable personal income, per capita, is rising at just a 1.5% annual rate — a far cry from the 3.7% rate hit in 2006 or the 5.2% rate hit in 1998.
Click to Enlarge Until wages rebound, Wall Street — giddy with excitement over the record highs in the Dow Jones Industrial Average and the S&P 500 — should act so surprised that many Main Street families are still struggling to get by.
Maybe this realization explains why the SPDR S&P Retail ETF (XRT), which surged so violently on Monday, gave a little back on Tuesday as retail stocks overall remain well off of their recent highs.