Is US Consumer Healthy?

12/05/2019 9:22 am EST


Landon Whaley

Editor, Gravitational Edge

The key for many analysts about our current economic condition is the strength of the U.S. consumer. Recent reports has put that strength in question, reports Landon Whaley.

Headline risks are everywhere, much like great white sharks off the coast of Gansbaai, South Africa, aka “Shark Alley.” There is never a shortage of “Headline Risk” candidates as the media, and the Old Institution remain hell-bent on misinforming the masses. This week’s “Headline Risk” comes courtesy of the Old Institution and their outdated and dogmatic way of evaluating economic data.

Two weeks ago, CNBC told us, “U.S. retail sales rebound...” MarketWatch followed suit, indicating that stocks were making fresh highs that morning in part because “U.S. retail sales growth rebounded in October, rising 0.3%...” Reuters confirmed the story saying, “U.S. retail sales rebounded moderately in October…”

The media’s coverage of the October retail sales report is based on the highly noisy and uninformative monthly growth rate. And contrary to what these headlines indicated, sales did not rebound, the consumer is not healthy, and there were zero improvements in the outlook for the U.S. economy.
If you’ve been with us for any reasonable stretch of time, you know that one of the ways we can make macro calls and position correctly before markets move is by evaluating economic data in year-over-year terms. To us, it’s highly intuitive to watch the slope (rate-of-change) of annual data because this provides a clear signal for the data set in question, and it avoids the noise that necessarily plagues the growth rate from one month to the next. Yet what is intuitive to us eludes the Old Institution.

While they are navel-gazing monthly growth rates that are jumping all over the place like a feline hopped up on catnip chasing a laser pointer, the annual growth rate of retail sales has been painting a very clear picture.

Retail sales have been accelerating for most of 2019, but that stopped when sales growth peaked at 4.4% back in August. Not only has retail sales now slowed for two consecutive months, but the supposed rebound in October’s sales was actually a 100-basis point drop in the annual growth rate. Folks, retail sales growth doesn’t make an elevator shaft move like this in a single month unless the consumer is in full hibernation mode. What’s more, this magnitude of decline is rare outside of recessionary environments.

 As regular readers know, a quick perusal of the Old Institution’s coverage of U.S. retail sales shows a glaring omission. These cats never, ever discuss the retail sales control group! Why does this matter, you ask? The control group’s annual growth rate is the most critical aspect of any U.S. retail sales report because it’s used in the actual calculation of U.S. GDP! Despite the high information ratio embedded in the control group’s growth, the Old Institution routinely ignores it. Luckily for you, we don’t and can report that the control group’s growth rate also slowed for the second consecutive month and is now residing at the lowest level in five months.

If you wait for the Old Institution to clue you into economic developments, you’ve lost the investing game before it’s even begun. The way they evaluate data has them consistently missing critical economic shifts until months after the fact.

The “Headline Risk” bottom line is that October’s retail sales report didn’t rebound, but it did confirm that the Retail-iation macro theme is alive, well, and continuing to provide us with an environment for opportunistically shorting U.S. retailers.

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