January Retail Sales: Let Them Eat Bacon!
Last June, Jeralean Talley, who had been the oldest known living person in the world, passed away in Detroit at the grand old age of 116. That left Susanna Mushatt Jones, also 116 and the second known living person born in the 1800s, to assume the throne. When asked about the secret to her longevity, the sprightly supercentenarian replied that she ate four strips of bacon every morning. She has a sign in her kitchen that reads, “Bacon makes everything better.”
Jones’ devotion to bacon may have amused the media, which had only just regaled the consuming masses with the results of a study that found bacon and other processed meats exacted untold damage on the human body, presumably resulting in shorter life spans.
Judging from recent retail sales behavior, the public has sided with Jones. “The bacon business appears to be immune to the consumer trend toward healthier cuisine,” noted Ellen Zentner, chief economist at Morgan Stanley in her group’s annual deep dive report into consumption trends.
As for what else has been insusceptible, The Liscio Report’s Philippa Dunne noted that home improvement sales were not only revised up sharply from December but tacked on another neat gain in January taking the growth rate over last January to 1.7 percent. Sales at the Home Depots and Lowe’s of this world likely signal the continued stunted mobility among many Americans who still owe more on their home than it is worth.
That factor aside, there was this little thing called a historic snowstorm that swept the East Coast in January, “Home improvement is just plain strong, seemingly without the help from the weather,” Dunne observed. Blizzard smizzard!
All in all, retail sales have been healthy for the past two months of reported data, reversing a string of disappointments. “Core sales,” which feed gross domestic product, net out autos, gasoline and home improvement sales; they rose at a 3.1 percent seasonally adjusted rate, which is a nice improvement from December’s 2.2-percent pace.
Aside from bacon and home improvement, some of the greatest growth categories headed into 2016, measured by their momentum in the second half of 2015, suggest consumers are keen to spend their hard earned dollars on “experiences” rather than “things.” The heretofore stronger dollar has had a hand in bolstering this trend as evidenced by strength in luggage, foreign travel and hotel billings.
When “things” do find their way into the shopping basket, they tend to enrich those great experiences. Apple watches showed up in the numbers, as did cellphones and all of those jazzy gadgets to help us keep track of our fitness levels, or lack thereof.
Glancing back to the tremendous de facto tax cut that made its way into households’ pockets last year, the decline in gasoline prices, Millennial motorcycles sales clocked the largest percentage-point gain among all categories tracked in the year ended December 31st. Following closely behind their two-wheeled cousins and as has been widely reported and impossible to miss on the nation’s highways, drivers have flocked to SUVs and hit the road in big style. 2015 marks the most vehicle miles driven in one year on record.
But there could be traffic ahead. Every month, the University of Michigan releases a treasure trove of valuable insights on the state of the U.S. consumer, including sentiment reported by different income brackets.
Some mirror-imaging has taken place of late. The stock market rout that started late last summer sapped the confidence at the top third on the income scale. During those same months, the bottom third of paycheck recipients were relatively giddy possibly reflecting higher minimum wages and lower pump prices. Reverse moves took place at the end of 2015 – the stock market’s temporary recovery buoyed sentiment among high earners while the onset of layoff announcements potentially depressed those populating the bottom third (no one ever said minimum wages were a free lunch.)
As for the good news in the rising saving rate, be careful to not glean too much from that particular metric. Luxury sales and stock market performance move inversely to one another. That stands to reason — some 40 percent of retail sales are derived from the top income quintile. It follows that the saving rate is also disproportionately influenced by this cohort.
“Any shift in behavior among this group (the top quintile) moves spending in the aggregate,” Zentner explains. “Following three straight years of double-digit growth in the S&P 500, stock prices fell in 2015 and so did spending among the wealthy, driving up the saving rate.”
Zentner’s colleague, Morgan Stanley’s lead retail analyst, Kimberly Greenberger, has cleverly coined the term “luxury recession” to describe the recent decline in high-end goods and sees the trend continuing into 2016. As is by script, pleasure aircraft and foreign auto sales were the worst two performing sectors in the durable goods space last year.
At the opposite end of the income spectrum, in a just-released survey, a third of Americans lament that they can’t afford to save for the three-percent minimum down payment on a home. Partly to blame is that mortgage lending standards have yet to return to where they were when the housing boom was sweeping the nation – an unequivocal good thing.
As for where credit has flowed more freely than it ever has, look no further than the auto sector. Janet Yellen was keen to highlight the robustness in car sales in her Congressional testimony earlier this week. That said, it’s no mistake that she failed to point out that one in five loans have gone to subprime and deep subprime borrowers, those least able to shoulder a pricey car payment. Maybe she hadn’t yet seen the data, also released this week, that defaults on car payments are only within three-hundredths of a percentage point from their 2007 highs, driven by subprime weakness.
In the meantime, the entrails of today’s University of Michigan preliminary release on consumer sentiment will not be available until the end of the month. The decline in the headline sentiment figure to the lowest reading since October, though, is likely an indication of the resumed slide in the stock market. Are high-roller shoppers staging a retreat? If that’s the case and for those with dry powder, this weekend’s Miami Boat Show might just present a great opportunity for buying a yacht on the cheap.
Back to Philippa Dunne and her partner Doug Henwood at Liscio, this dynamic due assesses the strength of the U.S. household using an unconventional but highly reliable gauge, state tax collections. They’ve been using this measure for so long that they easily recognize signposts when they first creep into view in their collective windshield.
“We sometimes joke that when our state tax contacts themselves turn the tables and get in touch with us about the results of our surveys, that’s an indicator in itself,” Dunne and Henwood report.
It might not be a joking matter that of late they have in fact been getting those unsolicited calls from their contacts who are voicing a growing concern about weakness in sales tax collections.
If the U.S. consumer truly is the only thing that stands between the U.S. economy and recession, we’d best hope the stock market comes roaring back and in a hurry.
