Strong Retail Sales, Consumer Confidence May Not Change Rate Outlook

10/16/2017 12:18 pm EST

Focus: STOCKS

Don Kaufman

Co-Founder, TheoTrade

The consumer looks good in the latest consumer confidence reports, writes Don Kaufman of TheoTrade. It's a good scenario for the consumer bacuse most people who want a job have one.


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The University of Michigan consumer confidence report was released on Friday. It had the highest reading since 2004. As you can see in the chart below, the 101.1 reading jumped from 95.1 last month. You can tell this survey isn’t flawed because the other two surveys seen below show the same trend. The expectation was for a reading of 95. If the consumer spend trend continues another 9 months, this will be the second longest expansion period since the mid-1800s. The chief economist for the Surveys of Consumers said there is "an unmistakable sense among consumers that economic prospects are now about as good as could be expected." 

chart 1

Personally, I don’t value these surveys as a cycle timing indicator because confidence can be fleeting, but a high reading doesn’t necessarily mean the cycle is about to end. However, it does tell us that the labor market is probably close to full employment. It’s a good scenario for the consumer because most who want a job have one and inflation is low. Even rent inflation, which has been a problem for consumers, has subsided as you can see in the chart below. Rent growth has decelerated in the past 6 months. OER in the chart stands for owner’s equivalent rent. This growth decline shows most people aren’t as flummoxed by housing expenses as they were earlier in the year. One possible explanation for this deceleration is multifamily construction has filled the void created by the single family housing shortage.

chart 2

The strong consumer sentiment led to great a great retail sales report which goes against the increase in credit card delinquencies that the bears have been harping about. U.S. retail sales had its biggest increase in 2.5 years in September. Retail sales increased 1.6% month over month and 4.4% year over year. That beat estimates for 1.7% growth. This is like how the employment estimates didn’t account for the hurricane effects. It was boosted by the reconstruction in the devastated areas of Texas and Florida where the hurricanes hit. 


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There was a big boost in building materials and motor vehicles. Sales at gardening and building material stores were up 2.1% month which was the biggest increase since February. Auto dealership sales were up 3.6% which is consistent with the auto sales report.

Besides building materials and autos, oil prices also pushed sales up. Finally, there was a 5.8% increase in service stations as people spent money fleeing the storms. As you can see in the chart below, excluding autos and auto parts, sales were 1% month over month and 4.6% year over year. If you take out autos, gas, building materials, and service stations, sales were up 0.4% from last month. There was growth in clothing stores, online retailers, and restaurants. Maybe the restaurant recession is ending. There was weakness in sporting goods stores and electronics stores as Amazon takes market share.

chart 3

Overall economic reports

I have been moderately bearish on the next 6 months of economic reports because some leading indicators have been showing weakness. One of those reports is the ECRI weekly leading index. As you can see from the chart below, the weekly leading index increased its growth rate for the 2nd straight weak as it’s up 1.2% from 0.7%. Two weeks ago, it was hovering near the flatline leading some to wonder if a recession was around the corner. I didn’t go that far, but I did think some weakness is coming. This report supports my claim as growth is still relatively low.

chart 4

The GDP Now forecast was lifted by the retail sales report and the consumer price index report which I’ll get to later. The forecast for real consumer spending growth increased from 2.2% to 2.5%. Retail spending drives GDP, so the spending at service stations in September might be enough for growth to exceed 2%. The NY Fed’s forecast increased from 1.53% to 1.70%. Retail sales contributed to 0.13%. Because the NY Fed model assumes there will be some sales growth momentum into Q4, the retail sales report boosted the Q4 GDP forecast to 2.91%. I said in September that the Q4 GDP estimate was too low because there would be some rebuilding.

Now I think it’s getting too high because a lot of the rebuilding is coming in September. By November and December, there will be less of an effect. The quarter’s results will be dependent on how holiday sales go. That’s uncertain. On the plus side, consumers are confident. On the negative side, the ECRI index shows low growth. As we get closer to the season, we’ll have a better idea of what will occur. The pre-order sales of the iPhone X might be a precursor for how the holiday season will go. Pre-orders start October 27 and sales start November 3.

chart 5

Inflation boosted by storms

As I expected, the CPI for September accelerated from August. Growth was 0.5% which was higher than last month’s 0.4%. Year over year growth was 2.2% which increased from last month’s 1.9% growth. However, this missed expectations for 0.6% month over month growth and 2.3% year over year growth. 75% of the increase in CPI was caused by the 13.1% increase in gas prices. That means the core CPI was only up 1.7% year over year for the fifth  straight month. The Fed has been raising rates in fear of inflation which has never materialized. Yellen has been blaming the decrease in wireless phone service prices for the disinflation as they had been down 14 straight months. However, the price of phone services increased 0.4% in September, but the same inflation numbers came out anyway.

This data did virtually nothing to the odds of a hike in December. The odds might change if Fed officials react to this headline in a dovish manner. In the PredictIt odds for will be the next Fed chair Powell is at 40%, Warsh fell to 24%, and Taylor is at 13%. The lower inflation goes, the better the chance there won’t be rate hikes even if a hawk is picked by President Trump in the next 3-5 weeks.

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