The Consumer Continues To Be The Backbone Of This Expansion
Summary
- Retail sales fell short of expectations, which may have raised some concerns.
- The core sales figure used to calculate GDP was better than expected, which suggests the economy continued to grow in the second quarter.
- Retail sales are predominantly goods, while consumers have been spending more on services.
- Therefore, the personal income and spending report is a better gauge of consumer health than retail sales.
- This idea was discussed in more depth with members of my private investing community, The Portfolio Architect. Learn More »
LordHenriVoton
The bulls keep running, as breadth continues to improve with yesterday’s surge led by the Russell 2000 small-cap index, which rose 1.2%. As for the S&P 500, the financial sector led the charge on earnings reports from Bank of America, Morgan Stanley, and Charles Schwab that all bested expectations. BAC's CEO Brian Moynihan noted during his bank’s conference call that “we continue to see a healthy US economy that is growing at a slower pace, with a resilient job market.” That is music to a soft landing’s ears. A consensus is building that the Fed will end its rate-hike cycle this month, inflation will fall within range of the Fed’s 2% target, and the economy will avoid a recession this year.
Finviz
It is the consumer who keeps this expansion alive, and yesterday’s retail sales report for June showed consumers are continuing to spend, but at a slower pace than in prior months for obvious reasons. Overall sales lagged expectations with just a 0.2% gain for the month and an increase of 1.5% over the past year. Yet control group sales, or “core” sales, which exclude the categories of autos, building materials, and gasoline, came in at twice the expectation for the month at 0.6%. This is the figure used to calculate GDP, and it rose 2.2% in the second quarter when compared to the first quarter, which indicates the expansion continued in the second quarter.
Bloomberg
What I follow most closely when it comes to retail sales is the real, or inflation adjusted, rate of year-over-year growth. Prior recessions started when this measure turned negative in a range of 1-3%, as can be seen below.
FRED
At first glance, there appears to be reason for serious concern, as real retail sales have declined within a 1-3% range for several months now with a trough of -3.5% in April. In prior cycles, this would be a huge red flag, but we must consider the anomaly of consumers shifting their spending to services over the past two years.
FRED
The only category of the retail sales report that covers services is sales at restaurants and bars. We did see a slowdown to just 0.1% growth monthly, but the year-over-year increase was 8.4%, which handily exceeds the rate of inflation. Consumers are still spending far more on services than goods, which is why I am not concerned about this red flag for now. The personal income and spending report, which covers goods and services, is more relevant.
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This article was written by
Lawrence is the publisher of The Portfolio Architect. He has been managing portfolios for individual investors for 30 years, starting his career as a Financial Consultant in 1993 with Merrill Lynch and working in the same capacity for several other Wall Street firms before realizing his long-term goal of complete independence when he founded Fuller Asset Management. In addition to writing for Seeking Alpha, he is also a Leader on the new fintech platform at Follow.co.
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