By the numbers
- First things first: Consumption is slowing.
- Retail sales eked out a 0.1% increase in August, as consumers stepped back on the heels of an upwardly revised strong 1.1% July gain.
- The control group number, which feeds directly into quarterly GDP, rose at a slightly better 0.3% pace for the month.
- A stepdown in sales was widely expected, and although the 0.1% was exceptionally modest, it still topped the consensus forecast for a fractional decline for the month.
- The August results were a strange mix of winners and losers across various retail sectors.
- Spending on bigger-ticket items lagged, as electronics and appliance stores and furniture retailers saw sales declines for the month. Auto dealer sales were also fractionally down.
- However, the decline wasn’t limited to discretionary spending, as grocery stores saw a 0.6% drop and restaurant sales were flat.
- The winners were fewer, but miscellaneous store retailers and online commerce posted brisk sales gains for the month, easily leading the way over the past year as well.
- Falling fuel prices were bad news for gas stations (down 1.2%) but good news for consumers, providing a little more wiggle room in spending budgets. Even so, consumers appeared more content to pocket the savings than not.
Goods consumption still in flux
- Coming out of the recession, but with lockdowns and social distancing still the norm, consumers went on a goods-buying binge fueled by excess savings and stimulus cash.
- As Americans returned to a more normal pre-pandemic lifestyle and social distancing ebbed, household spending habits also changed, with more consumers leaning harder into spending on travel and experiences that boosted the service industry but created a headwind for goods retailers.
- The effects of that whipsaw in spending habits still appears to be normalizing, as consumption on goods in particular remains somewhat volatile.
- Over the past year, retail sales increased by 2.1% — a solid but unspectacular result that reflects a broader slowdown in economic momentum.
- Household income growth has eased considerably as labor conditions have cooled and the massive stockpile of COVID-19-era savings has been largely depleted. As a result, consumers just don’t have the same spending firepower that they did a few years ago. Moreover, that appears unlikely to change in the near term.
Fed cut on deck: Will it be 50 bps?
- In the last week, there’ve been growing indications that the Fed’s opening rate cut may not be a quarter-point tiptoe into easing.
- It’s unclear whether there’s a rift within the central bank’s policy committee about how aggressively to move, although it’s unlikely that tomorrow’s policy statement will provide much insight into the degree of potential dissent.
- A 50-basis-point cut doesn’t seem unreasonable given the considerable loss of momentum in labor market conditions this year and continued progress in returning inflation toward a more palatable range around 2%.
- Over the past several months, most inflation measures have looked increasingly benign — even more so when shelter costs are removed. Other indications about rental rates and home prices continue to suggest that the shelter component of the consumer price index may be overstating the issue.
- It’s well known that the shelter component of CPI tends to lag actual market trends. If that proves to be the case in the current cycle, both headline and core inflation should be well positioned to decline further in the near term.
- The Fed will want to carefully control the narrative to avoid spooking the markets with a larger initial rate cut, providing reassurances that it’s not because they see a greater near-term risk of recession and a need to move more quickly and that economic conditions allow for such a move without the risk of another inflationary flareup.
The bottom line?
- The bottom line? Retail sales growth was weak in August, but still better than expectations. That’s a relative win, but one that won’t inspire a victory lap for retailers.
- That sets up the Fed for what will be an anticlimactic rate cut tomorrow, with two primary questions to be resolved: will policymakers give 25 or 50 basis points, and how will the Fed’s updated projections impact the outlook for inflation and the soft versus hard landing debate?
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