Orlando's Outlook: Ho, ho humbug?


Bottom line The Commerce Department reported on Wednesday that retail sales in January were much weaker than expected and also sharply revised December’s numbers down—news that initially stunned investors. But even with the weak January, Christmas 2017 was still the best 3-month holiday shopping season in six years, with a front-end-loaded 4.9% year-over-year (y/y) increase in retail sales. So the consumer, in our view, remains strong, with a solid labor market, a powerful wealth effect, rising confidence and more disposable cash to spend come spring, thanks to the personal tax cut.

November drove a very merry Christmas in 2017 Total retail and food service sales for the 3-month holiday period of November and December 2017 and January 2018 rose 4.9% on a y/y basis to a 3-month average of $492.8 billion versus a solid 4.2% gain for Christmas 2016. That’s above our own admittedly optimistic estimate here at Federated for a 4.5% gain, and it represents the strongest holiday shopping season since a 6.3% gain in Christmas 2011.

But January’s nominal month-over-month (m/m) sales change surprisingly declined 0.3%, well below the consensus gain of 0.2% that had been expected, and December was revised down sharply from a preliminary 0.4% m/m increase to breakeven. So the strength of this year’s holiday season was carried by November’s 0.8% m/m gain. On an annualized basis, we enjoyed the best November (up 5.9%) since 2011, so the bulk of this year’s holiday sales were pulled forward into the season’s first month.

Why is Christmas a 3-month retail-sales season? November includes Black Friday and Cyber Monday just after Thanksgiving, while Hanukkah and Christmas come in December. But gift cards don’t count as a retail sale until they’re redeemed, not when they’re purchased. So the week after Christmas, 15% of gift cards are typically redeemed, and consumers usually cash in another 60-65% during the first half of January. So 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.

What happened in December and January? Store traffic was lighter for several reasons:

  • The “bombogenesis”—a term meteorologists use for turbulent storm−ushered in a brutal stretch of cold weather for the third time in four years during the mid-December to mid-January period and the winter flu season has been the worst in 20 years, according to the Center for Disease Control.
  • Stores did a good job of controlling lean inventory levels during Christmas, so there was not a ton of excess product with sharp markdowns to entice shoppers after the holidays. As a result, apparel prices spiked 1.7% in January m/m, the largest such jump since February 1990, according to Rhino Trading.
  • Consumer debt (excluding mortgages and other home loans) rose 5.5% in the fourth quarter from a year earlier to a record $3.82 trillion, according to the New York Fed, and consumer non-housing debt accounted for a record 29% of their overall debt.
  • The savings rate slipped to 2.4% in December, a 12-year low.
  • Gas prices rose nearly 8%, from $2.42 per gallon in mid-December to $2.60 in late January, likely sapping some buying power.
  • Benchmark 10-year Treasury yields rose over this same period from 2.35% to 2.70%, which may have impacted some auto- and housing-related purchases.

Like the phoenix rising from the ashes We had expected consumers to hunker down during the back half of January and all of February to repair their balance sheets and raise some dry powder, in anticipation of a good “Mapril” shopping season. What will drive that consumer resurgence?

Confidence remains strong

  • NFIB small-business optimism index is just off a 34-year high at 106.9 in January 2018, up from 94.1 in September 2016.
  • ISM non-manufacturing composite index rose to a new 13-year high of 59.9 in January 2018, up from 51.7 in August 2016.
  • Leading economic indicators are at a 58-year cycle high of 107.0 in December 2017, up from 99.2 in February 2016.
  • Conference Board’s consumer confidence index is just off a 17-year high at 125.4 in January 2018, up from 100.8 in October 2016

Wealth effect surges The S&P 500 has risen by 60% over the past two years.

Strong labor market 

  • Initial weekly unemployment claims (a leading economic and employment indicator) for the survey week that ended Jan. 13, 2018, fell to 216,000, a 45-year low.
  • The unemployment rate (U-3) was unchanged at 4.1% in January 2018, its lowest level since a 3.9% rate in December 2000.
  • Wages rose 2.9% on a y/y basis in January 2018, a 9-year high. 

It ain’t just crumbs The tax cut is starting to boost worker pay checks now that the government has adjusted its new withholding schedules downward.

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