Louis Navellier explains the retail sales report … Home Depot’s enormous revenue miss … a new record of $17 trillion in consumer debt … more economic pain is coming says this Fed member
The U.S. consumer is stumbling.Maybe not falling down just yet, but certainly there are signs that the consumer isn’t keeping pace.Let’s begin by diving into yesterday’s retail sales report with the help of legendary investor, Louis Navellier.From Louis’ Special Market Podcast from Accelerated Profits:
Well, we got retail sales in and it was pretty weak.It came in at 0.4% while economists were expecting 0.8%. Fuel prices had fallen, so gas station sales dropped. Excluding gas station sales, retail sales rose 0.6%.It’s really hard for me to make this look good.One of the things that’s bothered me is in the past 12 months is retail sales have only risen 1.6%. That’s below the pace of inflation…Spending on any big-ticket items – durable goods, electronics, furniture, and appliances – they’re all weak. Only seven of the 13 retail categories surveyed improved in April.So, the good news is we’re growing. The bad news is we’re sputtering.
Let’s build on Louis’ point about this 1.6% gain being below the rate of inflation
You may have seen some financial pundits look at yesterday’s retail report and conclude “retail sales climbed for the first time since January. We’re back. This shows the consumer is healthy.”Well, that 0.4% gain was the nominal number, which means “not adjusted for inflation.” When we follow Louis’ lead and factor in inflation, we find that the real retail sales growth numbers have gone nowhere for about two years.See for yourself.Below, the light blue line below shows inflation-adjusted retail sales. The dark blue line is the nominal sales number.
If anything, real retail sales have dropped since 2021.
A perfect illustration of this sales-weakening was reflected in Home Depot’s earnings yesterday
Before we get to the report, keep in mind the significance of Home Depot’s financial performance.CNBC just called the company “the stock market’s most important retailer.” That’s because the status of its earnings and revenues reflects whether consumers are opening their wallets for, arguably, what consumers care about most – their homes.When consumers feel good, they spend money on upgrades, renovations, new home additions, and so on. When consumers feel anxious, spending on home goods/improvements dry up.So, Hope Depot’s earnings are a helpful, quantifiable way to measure how the consumer feels.Here’s CNBC:
Just an awful earnings report…Home Depot on Tuesday reported its biggest revenue miss in more than 20 years and lowered its forecast for this year, as consumers delay large projects and buy fewer big-ticket items like patio sets and grills…Home Depot said it now expects sales and comparable sales to decline between 2% and 5% for the fiscal year. It had previously predicted roughly flat sales for the period.
Clearly, this is not reflective of a healthy, confidence consumer.But as Louis noted, we’re still growing (though it’s nominal growth). Isn’t that reason for at least some optimism?It is. But we need to be open-eyed about what is, in part, driving much of this growth…
On Monday, a report from the Federal Reserve showed that consumer debt has set a new, record high of $17 trillion
Here’s CNBC with the details:
The total for borrowing across all categories hit $17.05 trillion, an increase of nearly $150 billion, or 0.9% during the January-to-March period, the New York Federal Reserve reported Monday.That took total indebtedness up about $2.9 trillion from the pre-Covid period ended in 2019.
Now, at first glance, you might be expecting this increase in debt to have a simple explanation: homes.The largest source of debt for Americans is mortgage debt. So, as home prices and interest rates have skyrocketed in recent years, it would appear obvious why consumer debt is soaring. And since mortgage debt isn’t necessarily a bad thing, we might be able to brush off this new record.That’s logical. Unfortunately, it’s not what’s happening.Back to Louis:
The mortgage debt hasn’t gone up that significantly.So, it looks like consumers are taking out credit card debt and other things they should not be doing. So, that means consumer spending is going to be fleeting.
Digging into the details of Louis’ point, we find that new mortgage originations, including refinancings, totaled just $323.5 billion in Q1 2023. That’s the lowest level since the Q2 of 2014.For additional context, it’s 35% lower than Q4 of 2022 and a whopping 62% lower than the same period a year ago.So, if mortgage debt – “good” debt – isn’t driving this new record amount, what is?Well, part of the answer is monthly expenses charged on credit cards.Here’s CBS News:
…Americans are carrying a record $986 billion in credit card debt, up 17 percent from last year.Inflation is causing many people to lean on credit cards to cover monthly expenses and most people are having to pay heavy interest on that debt…LendingTree says the average rate is about 21 percent, and the average balance is nearly $7,300. If you’re only making minimum monthly payments, that would take almost five years to pay if off.
Again, this does not reflect a healthy consumer.
Keep in mind, the weakness we’re seeing today stems from rate hikes the Fed enacted months ago…which means there’s more affects from the tightening to come
As we’ve noted in the Digest many times, there’s a six-to-eight-month lag between when the Fed hikes rates and when we feel the feel impact of those rates in the economy. So, what we’re feeling today reflects the Fed’s rate hikes from October (split the difference at seven months ago).What’s happened since last October?A 75 basis-point hike in November… a 50 basis-point hike in December… a 25 basis-point hike in February… a 25 basis-point hike in March… and a 25 basis-point hike in May…That’s a lot of additional pain in the pipeline.At least one member of the Federal Reserve is concerned about this.From Federal Reserve Bank of Chicago President Austan Goolsbee:
There’s still a lot of the impact of the 500 basis points we did in the last year that’s still to come.And you add on that there are tight credit conditions. And I think that we should be extra mindful. We need to take that into account and the only way to do that is sit and watch it.
Although, we can be encouraged by this as it’s suggestive of a Fed pause in a few weeks, we need to be open-eyed about what Goolsbee is saying: We haven’t seen the worst. There’s more pain coming.This is not good for a consumer who’s already stretched to the point of racking up record debt to finance day-to-day living expenses.
Finally, what about the domino effects of a sputtering consumer?
Specifically, if consumers are having trouble making ends meet, could that contagion spread to banks that have lent to consumers?From American Banker last week:
After late-payment rates on consumer loans fell during the pandemic’s early stages, lenders spent the last two years waiting for what they called a “normalization.” That return to normalcy is finally here, as delinquencies on credit cards and auto loans have recently either nearly reached or surpassed their pre-pandemic levels. The higher delinquency rates, which typically lead to banks charging off more loans in default, mark an end to a period of exceedingly strong credit performance.Executives in the consumer lending industry are anticipating that credit metrics will continue to worsen, though they hope the situation will remain manageable even in the event that the economy tips into recession.
Now, the reality is that our nation’s largest banks are well-capitalized against this type of growing consumer weakness. Many have increased their loan loss reserves to protect against this very issue. So, no need to lose any sleep there.But that doesn’t mean the entire banking sector is out of the woods, even though volatility in the sector has calmed in recent days.In fact, Louis is concerned there’s more volatility to come. That’s why, last week, he held a live, private briefing to explain the pressure in the sector, what he sees coming, and what to do about it today.Keep in mind, Louis has a perspective on this topic that most investors don’t. That’s because he’s an ex-banking regulator – he was an industry development analyst at the Federal Home Loan Bank of San Francisco.Here’s what Louis recently said about the chaos in regional bank stocks:
While PacWest and the other regionals have rebounded in recent days, banks have been suffering much more than just a tough week…In fact, it’s been disaster after disaster over the last few months. I don’t anticipate it getting better in the near future.But there are 3 things you can do today to make sure your cash is protected from any future bank failures.
We’re keeping a replay of Louis’ event available for a limited time. You can watch it for free by clicking here.Wrapping up, pressure on the U.S. consumer continues to ramp up, and we must keep our eye on this. After all, the Fed can pause all it wants, but if the consumer stops spending, the market is in trouble.Have a good evening,Jeff Remsburg
