"We Do Not Have An Explanation" - Home Improvement, Luxury Spending Unexpectedly Plunges

One of the main reasons for marcoeconomic optimism heading into last Friday's abysmal jobs report, is that the seasonally-adjusted April retail spending report came far stronger than expected, even as CEOs and CFOs of actual retailers have and continue to lament a dismal consumer spending picture (and as a result have continued to slash guidance). Indeed, the payrolls report confirmed that much if not all of the April retail sales rebound was due to seasonals and other "opportunistic" upward adjustments. Of course, after the May payrolls, all optimism promptly evaporated, and for a brief period "bad news became good news" as suddenly the Fed was seen as being on hold - again - indefinitely.

And with the Fed suddenly poised precariously between being the need to hike (so it can ease again shortly thereafter), and having to cut right now, a decision that could be finalized as soon as the June payrolls are reported in three weeks, the most important data point between now and then will again be the retail sales report, this time for May. It will be reported on June 14.

However, in advance of the official government data, courtesy of Bank of America we have the always informative monthly aggregated credit and debit card spending report, which traditionally gives an early look into consumer spending trends. What it reveals is that, not surprisingly, "the BAC aggregated card data decelerated more than the Census Bureau data at the turn of the year, when measured as retail sales ex-autos and gasoline." But while in recent months there has been a modest pickup at the headline level, if weaker when one excludes gasoline sales which are higher due to rising gase prices, the picture is far less pleasant if broken down by retail sales by high vs low-income consumers. In this case, the slowdown clearly continues for both groups of consumers, something which spells far more pain for not only GDP but for corporate profits as well as employment.

As BofA adds, "for the first time since the recovery, sales among the high and low end consumer cohort are growing at roughly the same pace (2.1% yoy). During the first four years of the recovery, the high end consumer outperformed, which reversed starting in 2014." We leave it up to readers if the chart below can be spun as "good":

 

However, what caught our attention is not so much the aggregate spending data, as the detail for what are arguably its two most important constituent components: luxury retailer sales, a proxy for the wealthy consumer, the one whose generosity was so instrument in the early years of Obama's "recovery", as well as spending on home improvements and related stores, a direct proxy for home purchasing and renovation, the single biggest component of US GDP, and thus, consumer spending.

It is here that something unexpected is happening.

First, when it comes to luxury retailer spending, BofA had this to say:

  • There has been a decisive slowing in spending on BAC cards at luxury retailers, which we define as high end designer retailers, exclusive of department stores.
  • This slowing has occurred over the past several years after the exceptionally strong growth during the early stages of the recovery.
  • However, the trend took a turn for the worse at the end of last year with the past four months looking particularly dire. In our view, this may have been a function of the poor market performance in January and February

To say that this is a very ugly harbinger of future retail sales, is an understatement.

But what was even more disturbing is what BofA found took place in spending on home improvement stores: spending which traditionally is directly correlated to new home purchases and construction. Instead of stealing BofA's thunder, this is what it said:

  • The BAC composite for home improvement stores tumbled in May, falling 4.6% mom SA, which pulled down the year-over-year growth rate.
  • However, the BAC home improvement series has been running below the Census Bureau aggregate, suggesting the recent weakness may be overstated by the BAC data.

BofA's punchline:

"We do not have an explanation for this divergence, but given the high correlation between the two series historically, we would expect our data and the Census Bureau figures to converge over time."

They sure will, but not to the government's seasonally-adjusted, politically biased, constantly massaged data. And when they do, yet another of the dominos in the fake narrative of "US recovery" lies
will topple.