Orlando's Outlook: Has the post-election consumer turned the corner?


Bottom line The Department of Commerce reported on Wednesday that retail sales in January were much stronger than expected—with sharply positive revisions for December—collectively helping to deliver a holiday shopping season whose powerful 4.6% pace of year-to-year (y/y) growth was surprisingly twice as bright this year as last.

What happened? We were forecasting moderate holiday-spending growth of 3-3.5% this year, in the wake of a modest 2.6% y/y increase in Back-to-School (BTS) spending. In our view, however, the shocking election results on Nov. 8, a surge in business and consumer confidence over the past several months and a burgeoning wealth effect from stock prices that have soared to record highs have combined to boost animal spirits, prompting consumers to open their pocketbooks and enjoy their best Christmas in five years.

Merry Christmas in 2016 The government reported that total retail and food service sales for the 3-month holiday period of November and December 2016 and January 2017 rose 4.6% y/y to a 3-month average of $469.5 billion. That is double the tepid 2.3% increase for Christmas 2015 and its average sales of $448.9 billion, which made for the weakest Christmas in seven years. By comparison, holiday sales enjoyed increases of 4.1%, 2.8% and 4.3%, respectively, for 2014, 2013, and 2012. So, 2016 was our strongest holiday shopping season since a robust 6.3% gain in 2011.

Why is Christmas a three-month retail-sales season? November includes Black Friday and Cyber Monday just after Thanksgiving, while Hanukkah and Christmas come in December. But a gift card doesn’t count as a retail sale until it is redeemed, not when purchased. The week after Christmas, 15% of gift cards are typically redeemed, and consumers usually cash in another 60-65% during January. To get a true reading of the overall strength or weakness of the holiday shopping season, we need to measure January’s gift-card redemptions.

Holiday spending ignored the BTS barometer in 2016 Historically, Christmas tends to be 80% positively correlated with BTS results, excluding weather problems. So with BTS spending up only 2.6% in July, August and September of 2016 y/y, we were conservatively expecting a moderate holiday-sales gain of 3-3.5%. In 2015, for example, BTS and holiday sales both rose an identical 2.3%, while in 2014, BTS and holiday sales rose 4.7% and 4.1%, respectively. So why was the pace of holiday sales in 2016 so much stronger than that of BTS sales?

Confidence has surged since the election The prospects of personal and corporate tax reform, deregulation, repatriation and more infrastructure and defense spending, key building blocks of “Trumponomics,” suggest a much swifter pace for economic growth over the next several years. Consequently, several of the confidence metrics that we monitor have gone vertical since the election: 

  • Michigan Consumer Sentiment Index leapt to a 12-year high of 98.5 with its final January 2017 reading, up sharply from 87.2 in October, a two-year low.
  • Conference Board’s Consumer Confidence Index surged to a 15-year high of 113.1 in December 2016, up from 100.8 in October, a three-month low.
  • ISM manufacturing index soared to a 2-year high of 56 in January 2017, up from a contraction-territory reading for the first time in six months at 49.4 in August.
  • ISM non-manufacturing business activity index rose to a 13-month high of 60.9 in December 2016, after plummeting to a 6-year low of 52.4 in August.
  • NAHB’s housing market builder-confidence index jumped to an 11-year high of 69 in December, up from 59 in August.
  • NFIB small-business optimism index surged to a 12-year high of 105.9 in January 2017, up from 94.1 in September 2016.
  • Philadelphia Fed regional manufacturing index spiked to a 33-year high of 43.3 in February 2017, up sharply from a -2.9 in July 2016.
  • Empire regional manufacturing index increased to a 2-year high of 18.7 in February 2017 from -5.5 in October 2016.
  • Dallas Fed regional manufacturing index soared to a six-year high of 22.1 in January 2017 from -4.8 in August 2016.
  • Richmond Fed’s manufacturing index rose to 12 in January 2017 from -11 in August 2016.
  • Kansas City regional manufacturing index leapt to 9 in January 2017 from -5 in July 2016.

Why is this recent rebound in confidence important? According to our research friends at Cornerstone Macro, there is an 86% historical correlation between the rising leading indicator of business and consumer confidence and a subsequent increase in the lagging indicator of real GDP growth. Here at Federated, we believe domestic GDP growth of 1.6% in 2016 will rise to 3% or higher by 2018. That stronger pace of economic growth also should drive higher corporate earnings, wage growth and productivity, which will ultimately drive share prices higher.

Wealth effect boosts spending The equity market, as a forward-looking, discounting mechanism, attempts to price into current valuation levels what it believes will happen in six-to-nine months. As investors looked across the proverbial valley since the election and began to discount a more market-friendly set of fiscal policies under a Trump administration and consolidated Republican control of Congress, stocks have soared to an ongoing series of record highs.

For example, since the intraday trough of the S&P 500 futures on election night—as stunned investors quickly dumped stocks 5% to 2,028.50 when they got the shocking news that Trump had won the election—stocks have soared to yesterday’s newest record intraday high of 2,351.31, for a price-only gain of nearly 16% in only 3-months’ time. We’ve seen similarly powerful moves in the Dow Jones, the Nasdaq, and the Russell 2000 indexes. This surge in paper wealth, in our view, helped to spark stronger-than-expected, post-election holiday spending, a positive economic trend that we believe has legs.

Here are the details on January’s retail-sales report:

Nominal retail sales rise Headline retail sales for January rose 0.4% month-over-month (m/m), much stronger than the modest 0.1% gain expected. December was revised higher to a powerful gain of 1%, up from a preliminary increase of 0.6%, and November was unrevised at a final gain of 0.2%. Among the strongest categories were eating and drinking places, with a gain of 1.4%, and apparel, which rose 1%.

  • January ex-auto sales strong Auto unit sales fell 4.4% in January m/m to 17.48 million annualized units, down from December’s 10-year cycle high of 18.29 million, while dollar volumes also declined in January 1.4%. As a result, January’s core retail sales—which strip out these volatile and disappointing auto results—rose 0.8%, double the pace expected. December rose 0.4%, which was revised up by two ticks, while November was unrevised at a final increase of 0.3%.
  • Ex-autos and gas strong, too Unleaded gasoline prices slipped about 2.5% nationally to $2.28 per gallon during January, as global crude-oil prices eased lower about 2% to $53 per barrel. So adjusted core retail sales—which strip out both auto and gasoline sales—rose by a stronger-than-expected 0.7% in January, more than double the 0.3% gain expected. December was revised up a tick to a gain of 0.1%, while November was unrevised at a final gain of 0.3%.
  • ‘Control group’ gain should boost first-quarter GDP So-called “control” results—which strip out autos, gasoline, food services and building materials, and feed directly into Commerce quarterly GDP calculation—rose 0.4% in January, a tick higher than expected. December was revised higher to a gain of 0.4%, twice the preliminary forecast, while November was unchanged at a final reading of breakeven. December’s positive revision for “control” should result in an upward revision to disappointing fourth-quarter GDP of only 1.9%, and January’s better-than-expected “control” strength should help first-quarter GDP get out of the gate in good shape, as consumer spending accounts for 70% of GDP.