No Impact From Tariffs On Consumer Spending Yet
Unless the boost in consumer spending growth in the last 2 weeks of August is related to pre-buying before the tariffs go into effect, the consumer is ignoring the tariffs and spending money normally. Specifically, the Redbook yearly same store sales growth reading in the week of August 31st was 6.5% which was up from 5.7% in the previous week. This is a strong reading for the week prior to the Labor Day holiday. I’m interested to see the reports from September.
I’m guessing there won’t be a large impact from the tariffs right away even though the University of Michigan sentiment index cratered in August because of the tariffs. I don’t expect an impact in early September because retailers are scrambling to deal with the taxes in other ways besides raising prices because that hasn’t worked. The immediate impact will be on retailers’ profit margins rather than consumer spending. However, retailers can’t deal with higher costs forever. If these tariffs continue into next year, there will be a big problem. That’s exactly why I don’t see the trade war waging on. Trump doesn’t want the consumer to be weak in an election year.
MBA Purchase Index Rebounds
Compared to the previous reports this year, the MBA purchase applications reading last week was bad. In the week of August 30th, refinancing fell, but the purchase index rebounded. Specifically, the composite index fell 3.1% after falling 6.2%. The refinance index fell 7% weekly after an 8% decline. Finally, the purchase index was up 4% after falling 4%. It was up 5% yearly; that’s up from the 2% yearly increase last week. There have been 3 weeks with negative yearly growth in 2019, making that week one of the weakest readings of the year.
The MBA index last week came along with the sequentially weak pending home sales index on Thursday. Those reports painted a relatively dark picture of the housing market even though it is headed in the right direction. As I have mentioned, home price growth will stop falling later this year if the labor market stays in similar shape, meaning the 4 week average of jobless claims stays below 250,000.
Looking at the long term, the BLS now projects the labor force will grow just 0.54% per year over the next decade. The magic number of job creation to keep up with that growth rate is only 68,000. This is just food for thought because the labor market is cyclical. There will be some downturns in the next 10 years. It’s clear America’s population growth will fall in the next decade regardless of the economy’s cyclical swings.
$54 Billion Trade Deficit
In July, the trade deficit fell from $55.5 billion to $54 billion. The estimate was $53.5 billion. As you can see from the chart below, the deficit has been increasing since 2014. It usually increases in expansions and narrows in recessions. The huge narrowing in 2009 wasn’t a good thing as the consumer was weak. The deficit in July was slightly above the $53.9 billion deficit in Q2 which means the net exports part of the Q3 GDP report has gotten off to a weak start.
Exports to China fell and imports rose which is why the deficit with China increased from $30 billion to $32.8 billion. The deficit wasn’t relatively high in Q1 which explains why the year to date deficit of $196.8 billion is below 2018’s year to date reading of $222.6 billion. Because of the strong dollar, global slowdown, and tariffs, trade growth has been weak. In July, exports fell 0.6% yearly which extended the losing streak to 4 months That’s the longest losing streak in 3 years. Imports were up just 0.1% yearly. The ISM data suggests trade weakness will continue into next year.
Q3 GDP Growth Could Be Weak
Initially, I expected Q3 GDP growth to be between 1.7% and 2.2%. My range has fallen to 1.5% to 2% because of the latest weak economic data. The CNBC calculation of the average and median estimate is 2%. That’s including 12 estimates. On Wednesday, Goldman announced its Q3 tracking estimate fell to 1.9% from 2%.
As you can see from the chart below, the blue chip average is near 1.8%. The Atlanta Fed Nowcast fell from 1.7% to 1.5% on Wednesday. The consumer will need to bail out the economy to just have a reasonable reading. Even so, quarterly growth of 1.5% isn’t recessionary. However, this looks more and more likely to be the worst slowdown of this expansion. The ECRI coincident index had 1.9% growth in July. It bottomed at about 1% growth in 2016. It’s highly likely that growth rate will fall below 1.5% in the next couple months. The economy is closing in on taking that trough out and there is no sign of a recovery in the near future.
In the Atlanta Fed model the estimate for real personal consumption growth fell from 2% to 2.8%. That would be much below Q2’s reading of 4.7%. We will get a much better idea of how the consumer did in Q3 in the August retail sales report which comes out on Friday September 13th. The control group has been on fire in the previous 2 months. Let’s see if that continues. The estimate for real non-residential equipment investment growth fell from -1.7% to -2.4%. That’s putting pressure on the consumer to do well. Due to the latest trade report, which I just described, the estimate for the contribution of net exports to Q3 growth fell from 0.26% to 0.33%.
Conclusion
The economic data has been coming in soft lately. That’s why the August retail sales report is so pivotal. Consumer spending growth will need to be strong just to get quarterly GDP growth above 2%. If it wasn’t for the consumer, the economy would be in a recession. So far, the consumer doesn’t seem to have been impacted by the tariffs based on the past 2 weeks of the Redbook same store sales report. However, that report isn’t always accurate, so we need more data to make a definitive judgement.
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