Orlando's Outlook: Will surge in confidence boost consumer spending?


Bottom line Although the most polarizing presidential election in history is now behind us, ugly ripples remain among family and friends, likely invading cocktail-party and dinner-table conversation over Hanukkah, Christmas and New Year’s Eve and Day. While election angst—among myriad other concerns—had a noticeably deleterious impact on economic growth and financial-market performance over the course of 2016, the post-election environment has been a revelation, with soaring confidence readings and the largest post-election stock market rally in history. But will stronger trends in consumer spending, which account for 70% of U.S. GDP, follow suit, particularly with “Trumponomics” promising to cut tax rates, boost economic growth and employment, and raise wages? Perhaps, however recently released November results for both retail sales and personal income and spending paint a more muted picture.

Consumer confidence has surged since the election. Americans were thoroughly disgusted with the dishonest tone and lack of civility in the presidential election campaigns. This might have instilled an economic chilling effect on businesses and consumers alike. But since the election season ended:

  • Michigan Consumer Sentiment Index leapt to a 12-year high of 98.2 in December, its final 2016 reading. That’s up sharply from 87.2 in October, which was a two-year low.
  • Conference Board’s Consumer Confidence Index surged to a more than 15-year high of 113.7 in December, up from an already stout 107.1 in November (versus 100.8 in October). The consensus estimate for December was only 108.5.
  • ISM nonmanufacturing business activity index (which accounts for about 88% of total economic activity) soared to a 13-month high of 61.7 in November, after plummeting to a six-year low of 51.8 in August.
  • NAHB’s housing market builder-confidence index (HMI) jumped to a much stronger-than-expected 11-year high of 70 in December, up from 63 in both October and November.

Even manufacturing confidence is rising, after being an economic laggard as of late. Compared with firmer sales readings for autos, housing and consumer spending, industrial activity has been slow. But since the election:

  • ISM manufacturing index, which moved in August into contraction territory for the first time in six months at 49.4, rebounded into growth mode (i.e., above 50) in each of the past three months. That included a surprisingly stronger-than-expected reading of 53.2 in November, amounting to a five-month high. December is expected to rise further, to an estimated 53.6 (released on Jan. 3).
  • Empire regional manufacturing index rose from a -6.8 in October to a stronger-than-expected 9.0 in December.
  • Philadelphia regional manufacturing index spiked from -2.9 in July to a much stronger-than-expected 21.5 in December.
  • Kansas City regional manufacturing index leapt from 1.0 in November to a much stronger-than-expected 11.0 in December.

American Association of Individual Investors (AAII) is still bullish at 44.6%, versus a 29.2% bearish reading. That’s the sixth-consecutive week investor optimism has been above 40%, compared with its historical average of 38.5%. So a strong percentage of investors believe that stocks will rise over the next six months, and the shift to a bullish outlook coincided with the election results.

Christmas tree indicator is stout, as Evercore ISI’s annual Christmas tree unit sales survey boasted robust year-over-year (y/y) sales gains of 10% for 2016. That’s the strongest results in the 13-year history of the survey, compared with more moderate gains of 8% in 2015 and 7% in 2014. ISI speaks with 26 regional Christmas tree associations, farmers and retailers in the U.S. and Canada during each of the four weeks between Thanksgiving and Christmas to gauge the strength or weakness of Christmas tree, wreaths and garlands sales. The underlying investment thesis is that if consumer confidence is high and the economy is strong, people likely will spend more money on holiday decorations, in addition to gifts, food and beverages, and travel.

Strong Christmas is not a slam dunk, even with the record level of the tree indicator. That’s because of the admitted flaw in this indicator, namely that its correlation with broader retail sales trends during the holiday season is inconsistent. While this year’s tree indicator is at a record level of strength, it provides no guarantee consumers will follow at the same brisk pace. Consider November’s disappointing personal income, spending and savings-rate trends:

  • Personal income was unchanged in November, likely consolidating from a stronger-than-expected 0.5% gain in October, which was the strongest change in six months, back to April’s month-over-month increase of 0.7%.
  • Personal spending increased at a softer-than-expected pace of 0.2% in November. That was half the rate of October’s 0.4% month-over-month (m/m) gain, and down sharply from September’s potent increase of 0.7%, which was spending’s largest m/m rise in five months. April enjoyed a substantial gain of 1.1%, a nearly seven-year high.
  • Personal savings rate fell to 5.5% in November, down from 5.7% in October and 6.0% in August. The latter was a three-year high, due to the unchanged level of income in November relative to the modest gain in spending. The lower savings rate represents a potentially significant reduction in dry powder to generate holiday spending after a disappointing Back-to-School season.

Is Back-to-School (BTS) season a good barometer for holiday spending? Discounting for poor weather, the answer usually is yes. In fact, Christmas historically tends to be 80-90% positively correlated with BTS results. Spending for school rose 2.6% in July, August and September of 2016 on a y/y basis. That compares with a somewhat weaker 2.3% gain in 2015 and more robust sales increases of 4.7% in 2014 and 4.0% in 2013. What does this year’s BTS figure augur for Christmas 2016? We will know soon, but for comparison, the similar 2.3% BTS number in 2015 translated to a rise of 2.4% for November, December and January in 2015 (see below why we include January). For further comparison, holiday spending rose 4.1% in 2014 and 2.8% in 2013.

Looking only at November and December spending levels, the National Retail Federation (NRF) is forecasting a 3.6% sales gain for 2016 and the International Council of Shopping Centers (ICSC) is forecasting a 3.2% y/y increase.

We’re straddling those two forecasts here at Federated, with an estimated 3.0% to 3.5% gain. But we look at a three-month period that includes January, because of the importance of post-holiday gift-card redemptions. Gift cards don’t count as a retail sale until they’re redeemed, not when they’re purchased. In the week after Christmas, about 15% of gift cards are typically redeemed, and 60-65% are usually redeemed during the month of January. So we really need to see the amount of January gift-card redemptions for a clear reading of the overall strength or weakness of the holiday season.

How did holiday spending start this year? November nominal retail sales rose a disappointing 0.1% m/m, but they were nearly 3.8% higher y/y, which is a solid start. But it was very promotional (50%-off sales, or even higher discounts, abounded the week before Christmas), inventories were lean and we’re expecting December and January to be somewhat softer. In terms of the sales splits, brick and mortar sales will probably break-even y/y, while online growth remains a juggernaut, up some 10-20%, with mobile spending accounting for nearly half of that. Black Friday and Cyber Monday hit online records, and First Data Corp. said that e-commerce accounted for 25% of all Black Friday spending this year, up from 18% in 2015. Delivery giants UPS and FedEx are reporting record shipping volumes, up 10-15% from 2015.

Here are the details on November’s m/m sales gains (softer than those of September and October):

  • Nominal retail sales rose only modestly. Headline retail sales for November rose 0.1% m/m, two ticks lighter than expected. October rose a stronger 0.6% (revised down from an 0.8% gain), while September was unrevised with a powerful final increase of 1.0%. November’s category strength was led by eating and drinking places (up 0.8%) and furniture (up 0.7%).
  • November ex-auto sales were also weak. Auto unit sales declined 0.08% in November m/m to 17.75 million annualized units, and dollar volumes declined 0.5%. As a result, November’s core retail sales—which strip out these poor but volatile auto results—rose 0.2% m/m, half the level that had been expected. October was revised down two ticks to a gain of 0.6%, and September was revised up a tick to a final gain of 0.8%.
  • Ex-autos and gas sputter, with unleaded gasoline prices slipping 2.3% nationally to about $2.15 per gallon during November due to falling crude-oil prices, although gasoline volumes at retail stations rose 0.3%. So adjusted core retail sales—which strip out both the soft auto and gasoline sales—rose by 0.2% m/m, half the level that had been estimated. October was revised down a tick to a healthy 0.5% gain, and September was unrevised at a final 0.5% gain.
  • ‘Control group’ makes weak contribution to GDP So-called “control” results—that strip out autos, gasoline, building materials and food service, and feed directly into the Commerce Department’s quarterly GDP calculation – rose a disappointing 0.1% m/m, compared with consensus expectations for a 0.3% gain. October rose by a relatively healthy 0.6%, which was revised down from a preliminary gain of 0.8%. September was unrevised at a final gain of 0.3%. So the poor November and October’s downward revision in “control” should negatively impact fourth-quarter GDP.

We wish everyone a New Year filled with good health, much happiness and great success!

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