Slight Increase in Consumer Confidence
The University of Michigan consumer confidence survey in August was terrible. This led some investors to get scared because it seemed like the consumer was in trouble. However, it’s notable that this survey is correlated with the stock market. Volatility in stocks definitely played a role in this decline. Technically, that’s not inconsistent with saying tariffs caused the decline in sentiment because tariffs caused the volatility in stocks. Ultimately, retail sales growth was strong in August. Thus, calling into question the pessimism shown in this sentiment reading.
As you can see from the chart above, the overall index improved slightly from 89.8 to 92 which beat estimates for 91. I think you should ignore those saying this index is in a downtrend. If stocks reach a new record high and there is more positive news on trade talks, this index will improve. Clearly, retail sales don’t need confidence to be strong to show great growth.
Specifically, in the September preliminary report, current conditions improved from 105.3 to 106.9. And expectations improved from 79.9 to 82.4. Overall preliminary reading was the third worst since President Trump was elected. However, I can see the final index showing improvement since stocks have rallied since the cutoff date for this survey.
Consumers see the Fed cutting rates on Wednesday which it will as there is an 79.6% chance of a cut. The net expected decline in interest rates was the highest since February 2009. In this September reading, 38% of consumers made spontaneous negative mentions of tariffs which was the highest since March 2018. Investors see a decline in this percentage as a source of sentiment improvement. It will decline if there is an interim deal this fall. Many been calling for a trade deal either late this year or early next year.
That thesis was supported by Friday’s news as China announced it added soybeans and pork to its tariff exemption list. These exemptions will last until September 16th, 2020. This is like the reverse of the past year where each side would raise tariffs after the other side did.
Now they keep eliminating them ahead of the October meeting. Soybean exports have been one of the most important sticking points in Trump’s negotiations. He has asked each country he has negotiated with to increase their agriculture purchases from America to lower America’s deficits.
Despite tariff fears, 1 year inflation estimates in the consumer sentiment report only increased 0.1% to 2.8% and the 5 year outlook fell 0.3% to 2.6%. Consumers are correct that inflation won’t be boosted by tariffs since they are hurting demand. Non-tariffed goods have seen prices decline as you can see from the chart below. Expectations for modest inflation are in line with expectations for rate cuts. You can’t expect interest rates to fall and inflation to be very strong.
Another Great Retail Sales Report
University of Michigan consumer sentiment report was very wrong because the August retail sales report was strong. Monthly headline retail sales growth was 0.4% which doubled estimates for 0.2%. That was on top of a positively revised July reading which went from 0.7% to 0.8% growth. It’s rare to see monthly growth beat estimates on a report that had the previous month revised higher.
As you can see from the chart below, yearly growth improved from 3.6% to 4.1%. That’s the highest growth rate since October 2018. There has been a strong stretch of improvement since December’s terrible growth reading of 1.4%. Real retail sales growth improved even more because inflation fell. Real sales growth increased from 1.7% to 2.3% which is the highest growth rate since August 2018.
Monthly retail sales growth excluding autos was 0% because autos drove headline growth. This missed estimates for 0.2% and fell from 1% growth. That was a tough comp. Motor vehicles and parts had 1.75% monthly growth and 6.76% yearly growth which over doubled July’s yearly growth rate. This was the highest yearly growth rate since February 2016. Excluding autos and gas monthly growth was 0.1% which missed estimates for 0.3% and July’s 0.9%.
Great Control Group And Online Sales Growth
It's curious about the control group because it had very strong growth in the previous 2 months. August’s reading was very strong. Monthly growth was 0.3% which met estimates. That’s really good considering July had 1% growth. Yearly growth improved from 4.94% to 5.3%.
As you can see from the chart below, the quarterly annualized growth rate was 7.5% which is one of the highest rates since 1990. Control group sales growth met estimates, but this was still an amazing report considering Bank of America’s credit card data predicted sales growth of -0.5%.
Online retail sales growth was amazing again. Monthly growth was 1.62% and yearly growth was 16.03%. It was the highest growth rate since December 2000. If you divide online sales by total sales, online sales now represent 12.8% of total sales. The share was only 6% in December 2000.
The Negative Story
A negative part of this report is that 7 of 13 major categories saw monthly declines in sales. Motor vehicles and parts and e-commerce helped sales growth by 0.35% and 0.21%. They were responsible for well over 100% of growth. One of the weakest readings was the 1.23% monthly decline in food services and drinking sales.
As you can see from the chart below, yearly growth fell from 3.33% to 1.1%. That’s the weakest growth rate since February 2010 when the economy was just exiting the recession.
Some say that restaurant sales growth is a leading indicator for the economy, but the facts disagree. Right before the last recession, in November 2007, restaurant sales growth was a strong 5%. Restaurant sales growth was just 1.7% in January 2014 even though 2014 was a solid year for the economy.
Right before the 2001 recession, in February 2001, restaurant sales growth was 4.7%. Don’t get me wrong, the weakness in restaurant sales growth in August isn’t good. It just doesn’t signify economic weakness is coming.
Recent Comments