While big banks blame the collapse in Q1 GDP on "residual seasonality" (more on that later), with BofA recently slashing its Q1 estimate from as much as 2.7% to just 0.2%, the reality is that something is not well with the US consumer. The latest proof of this comes from the most recent Bank of America credit and debt card spending data, which reveals that sales were once again down 0.1% yoy.
And unlike on previous occasions, one can't blame it on gas at the pump, as gasoline prices have increased. Still, on a trailing basis, headline sales have been depressed by less spending at the pump due to lower prices. On a three month moving average, retail sales ex-autos are down 0.2% mom SA while retail sales ex-autos and gasoline are up a more moderate 0.3% mom SA.
The chart below shows the seasonally adjusted retail sales ex-autos measure from the BAC aggregate card data was unchanged SA in March, leaving the 3-month moving average to decline 0.2%. While a part of this weakness owes to a continued decline in gasoline prices. We find that retail sales ex-autos and gasoline was up 0.3% mom SA, which continues to be in a downward trend.
This confirms the downward revision to the Census Bureau data in January which made government data more consistent with the BAC internal data. According to Bank of America, "we therefore also look for only a slight improvement in March Census Bureau sales, in a similar pattern as the BAC internal data" which means that Q1 GDP is weak for a very specific reason: consumer spending remains anemic.
Bank of America then proceedds to look at spending trends for different income groups. It creates a proxy for the two ends of the income distribution using average income by zip codes. After ranking the zip codes by average income, it takes the top 3% of zip codes to capture the high-end consumer and the bottom 3% of zip codes to represent the lower end. BofA finds that the spending among the high-end has outpaced the lower-end consumer post-crisis through early 2014.
Since then spending has accelerated for the low-end, particularly in the summer of 2014 along with the drop in gasoline prices. The lower-end consumer is more budget constrained and therefore has a greater propensity to spend out of gas savings. Meanwhile higher-end consumer spending has slowed, particularly at the end of last year, which could reflect the uncertainty in the financial markets. In the past few months, spending for the low-end consumer has slowed, falling back below the growth rate of the high-end cohort.
In the chart below, BofA sees a similar pattern with the upper and lower income households, but not as obvious as the zip-code based proxies.
What do household spend on? BofA looks at the composition of spending for each income cohort, dividing spending on each sector by retail sales ex-autos. Food & beverages was the biggest spending category across all income groups in March. Health & personal care was the second biggest category. Conversely, households spent the least on electronics and furniture, which are more big-ticket purchases. As income increases, the average household spends a lower share on basic necessities like food and clothing. Instead, consumers will allocate a relatively greater share of spending on hobbies and furniture.
Finally, and perhaps most troubling, is the sharp dropoff in services in the past year, while spending on goods is barely positive on the year. BofA defines services as the combination of spending on restaurants, hotels and airlines. This is only a portion of actual services spending – notably, housing and healthcare are not captured. BofA finds that The gap between services and goods widened over last year, but in the past few months, it has narrowed back as spending on services has slowed.