Submitted by Lance Roberts of STA Wealth Management,
Yesterday, I discussed whether corporate fixed investment would indeed make a resurgence, as many analysts and economists are hopeful of, in 2014. In that article, I discussed the link between personal consumption expenditures and business capital investment. What is becoming clear is that, on an annualized basis, personal consumption is weakening which historically doesn't bode well for fixed investment. Yet, there are many hopes that the consumer will begin to ratchet up spending in the coming year which will drive economic growth above 3%.
With these hopes in mind, I thought it would be interesting to look at a couple of different measures of more "real time" retail sales survey's to get a clearer trend of the consumer. Retail sales make up about 40% of PCE so, while not a complete picture of the consumer, it does give us some insight into their strength or weakness.
This morning, the ICSC-Goldman Sachs weekly retail sales survey was released which showed a 50% decline in retail sales post the Christmas holiday. This is not surprising, of course, as the rush to buy Christmas gifts is complete and consumers have a short respite before the credit card statement arrives. However, while one week's worth of data doesn't tell us much, a look at the longer term trend is more revealing. Since the index is comprised of weekly data, which is extremely noisy, I have used a 3-month moving average of the annual percentage change to smooth the series going back to 1989.
We can also take a look Gallup Consumer Spending Survey, also weekly, and do a similar analysis. What is interesting is that the Gallup data is a "sentiment survey" of spending intentions. However, it tracks extremely close to the actual retail sales data as collected by ICSC.
One anomaly in the Gallup data occurred at the end of 2012 as the "fiscal cliff" debacle loomed large. At that time companies were fearful of large tax increases due to expiration of the "Bush Era" tax cuts and the rushed to pay out abnormally large year end bonuses and dividends to executives and employees. This flush of cash resulted in increased spending sentiment at the time but did not translate into actual action as shown in the chart above.
Of course, the real question is how does the ICSC-GS data compare to the government reported retail sales data. The chart below is a comparative analysis of the two data series using the 3-month average of the annual rate of change to smooth the data.
As you can see the trend in the data is clearly weakening and is unlikely to change much in coming months as higher healthcare costs, and taxes, weighs on consumer's disposable incomes.
As I stated in yesterday's post:
"The decline in PCE is troubling for a couple of reasons. First, PCE comprises almost 70% of the economy and that consumption is what drives corporate demand. Secondly, all previous annualized declines in PCE have led to declines in fixed investment. Given the current annualized decline in PCE, this would be the first time in history that fixed investment surged against such a backdrop."
Retail sales are not currently indicating that the consumer is about to "drop kick" a game winning field goal in the coming year. While the consumer is definitely "not dead," as evidenced by increased leverage in the recent credit reports, they are also not currently in the position to substantially increase demand five years into an economic recovery. My perception is that the "struggle through" economy is likely to remain in 2014 which will disappoint the economic bulls.