The latest retail sales report dented recession fears. should not be.
When data showed that April sales for US retailers rose 0.9% from the previous month and 8.2% from a year earlier, Wall Street celebrated. Economists and strategists have concluded that while consumers are miserable, they are still spending — enough to prevent an economic downturn as the Federal Reserve raises interest rates and shrinks its balance sheet to combat high inflation. But this, which fits in with the prevailing narrative that the central bank will make a soft landing, is very wrong.
First, inflation-adjusted numbers are called “real” for a reason. When adjusted for nominal sales figures reported using the Consumer Price Index, they were negative in April — and for the second month in a row. Baseline effect is a factor, given the big jump a year ago that makes comparison difficult. “But even so, a lot of these gains are just price hikes, not volume,” says Lynn Alden, founder of Lynn Alden Investment Strategy.
The problem extends beyond retail sales. Economists in
Suppose that a “nominal bias,” or the effect of prices on survey index levels caused by respondents thinking nominal rather than real, means that the pace of economic growth is about two percentage points lower than the 3.5% rate indicated by the unadjusted activity index.
Retailer earnings reports reflect the idea that consumers are paying more and not buying more. at
(Stock ticker: HD) Sales rose 3.8% in the first quarter as higher prices offset an 8% decline in transactions. at
(WMT), the nation’s largest retailer, had flat transactions a year ago, but higher prices pushed average receipts up 3%. Sales of general merchandise are down because food inflation has pulled more dollars off of other items. As David Rosenberg, chief economist at Rosenberg Research, said, “Inflation is masking ‘real’ data that is not as favorable as some believe.”
Second, consider the often-cited statistic that supports predictions of a soft landing. Many economists say consumers are sitting on trillions of cash accumulated during the pandemic. But what they don’t say is that inflation erodes savings as inflation-adjusted incomes fall. The idea also overlooks the pain in lower-income families, which have a higher propensity to spend, as the cost of necessities increases. There is very little ‘excess savings’ left in the economy, and recent results from the nation’s largest retailers are proof of that,” Rosenberg says.
Not to mention the stock result. Rosenberg says the pace of inventory buildup has outpaced sales in three of the past four months — welcome news on the supply chain front, but likely ushering in a cycle of inventory disposal and production cuts. This is data from SpaceKnow, which monitors economic activity from space, showing that the movement of goods from warehouses to retail centers and customer homes has slowed. Walmart’s logistics data slowed first, with overall activity now catching up (or plummeting), says Anu Murgai, the company’s vice president of business solutions. Two conclusions: retail volumes are declining and inventories are rising, the latter of which is likely to affect GDP.
Third, consumer credit data undermines the jubilant consumer narrative. Consumer credit grew 39% in March compared to February, when it jumped from the previous month, and more than tripled from a year earlier even as the cost of credit rose. The good news, say Goldman Sachs economists, is that revolving credit balances – credit cards – are still lower than usual and household leverage doesn’t seem to be an issue yet. The bad news: If revolving consumer credit continues to grow at its current pace, balances will return to full normal, and spending restrained, in the third quarter.
There is a silver lining in the consumer who is not as healthy as many think. To some extent, higher rates may begin to remedy higher rates, raising the odds that the Fed will not tighten as much as feared. Whether inflation cools enough to stave off stagflation and continued growth to prevent stagflation is another question.
write to Lisa Belfuss at email@example.com