Consumers - 40% Worry About Tariffs - Trade Deal Needed Soon?

Consumers Starting To Worry About Tariffs

Consumers are reacting to the trade deal in several sentiment reports. Recently, tariffs likely caused the June University of Michigan Consumer Sentiment index to fall.

Let’s look at the actual data on what consumers said about tariffs. 40% of consumers spontaneously mentioned tariffs negatively in early June as you can see from the chart below.

It’s a new high for this survey which began in February 2018. That’s up from 21% in May. The previous record high was 35% in July 2018.

As you can tell, the minor spat with Mexico and the big tariff on Chinese goods, which was announced on May 10th and went into effect in late May, has gotten the attention of consumers.

Similarly, the unaided references to buying durable goods in advance to get ahead of the tariffs increased from 12% in May to 19% in June. The highest level since February 2018 was in March 2018 when it was 21%.

Takeaway here can either be positive or negative depending on your rationale.

There are 3 logical conclusions. Obvious bad news is consumers are the most focused on tariffs since President Trump started proposing them.

Consumers have a worse opinion on the future economy because of tariffs. A positive spin is that even though consumers are widely aware of tariffs, the sentiment index didn’t crater.

If this is as bad as it gets, it’s not that bad. The final perspective considers how pre-buying affected retail sales growth in May. If there was a burst in pre-buying in May, then one must wonder if growth was artificially inflated and if it will fall in June.

Maybe consumers will pre-buy even more in June because they think more tariffs are coming.

We saw pre-buying before tariffs last year, but that was by businesses. Consumers don’t follow the trade war as closely. It’s easier for a business to budget for more steel than it is for a consumer to buy a washing machine before they planned to because they might not have the savings available.

Consumers - Housing Market Index Falls

It was surprising to see the 2 point decline in the June Housing Market index because interest rates have been declining.

As you can see from the chart below, the S&P 1500 homebuilder group has a very high correlation with the 30 year fixed mortgage rate (inverted). Present index for single family sales fell 1 point to 71.

Expectations for the next 6 months fell 2 points to 70. That could be because of the trade war. Finally, the traffic of prospective buyers index fell 1 point to 48. This index has been below 50 since last October.

Now let’s look at the regional data. This decline was driven by the northeast and the west. Northeast’s index fell 5 points 60 and west’s index fell 4 points to 69.

South’s index was steady at 68 and tMidwest’s index was up 3 points to 59. Housing should be strong in the Midwest because it is where housing is the most affordable.

April housing affordability index was 187.8 in the Midwest. It was 170.4 in the northeast, 152.9 in the south, and only 111.9 in the west.

Housing Starts & Permits Beat Estimates

Consumers - Even though May housing starts and permits both beat estimates, this wasn’t a great report. It was more of the same. That explains why this report caused the Atlanta Fed’s Q2 estimate of real residential investment growth to fall from 0.4% to 0.3%.

Technically, positive growth is good. Real residential investment growth has been negative for 5 straight quarters. But it’s headed in the wrong direction. That adjustment sent down estimates for Q2 GDP growth from 2.1% to 2%.

Specifically, housing starts were 1.269 million which beat estimates for 1.239 million. This beat the original April forecast which was revised up from 1.235 million to 1.281 million.

As you can see from the chart below, yearly growth in housing starts was -4.7% which was the yearly 7th decline in 8 months. Permits were 1.294 million which beat estimates for 1.29 million. The April reading was revised down from 1.296 million to 1.29 million.

Single family housing starts growth has been terrible. But multi family starts growth has been great. In May, single family starts were 820,000 which is a 12.5% yearly decline.

Multi family starts were 449,000 which is a 13.7% yearly increase. Permits were down 0.5%. Completions fell sharply to 1.213 million.  

Redbook Growth Improves

Consumers - In the week of June 15th, Redbook yearly same store sales growth was 5.4% which improved from 5%. There are worries pre-tariff buying could cause retail sales growth to drop as early as June. Growth similar to May in the first half of June, implies growth isn’t plummeting yet.

As you can see from the chart below, from 2008 to mid-2018 Redbook same store sales growth was highly correlated with general merchandise sales growth.

Late last year, there was a massive divergence as retail sales growth declined and Redbook sales growth spiked to record levels. It truly made no sense and confused me at the time. Lately, the correlation has strengthened.

Current divergence isn’t much. Meaning it’s safe to look for solid general merchandise sales growth in June as long as the Redbook results hold up in the next two weeks.

Consumers - Conclusion

Tariffs are being noticed by consumers. However, they haven’t yet sharply pulled back from spending, so no need to be alarmed.

In fact, Redbook same store sales growth improved in the week of June 15th as growth was 5.4%. That’s a very solid result. Even though interest rates have been plummeting, the housing market index fell slightly in June.

Housing starts and permits were more of the same. Multi family growth was strong, but single family growth was weak. Real residential investment growth might be positive in Q2, but not by a lot.

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