Orlando's Outlook: Surging confidence drives accelerating retail sales

09-21-2018

Bottom line While growth in retail sales in August was softer than expected, the powerful upward revision to July results more than compensated, placing important Back-to-School (BTS) sales this year on their fastest growth pace in seven years.

Both nominal and “control” retail sales in August were surprisingly weaker-than-expected, rising only 0.1% on a month-over-month (m/m) basis, compared with expectations for more solid 0.4% gains. But July was revised sharply higher to gains of 0.7% and 0.8%, respectively, such that BTS sales during the first two months of the season have surged 6.7% on a year-over-year (y/y) basis, the strongest such results since 2011.

Ordinarily, we’d be anxiously awaiting September results to round out the season, as the Labor Day weekend and the first half of the month typically contribute to BTS totals. But with Hurricane Florence this year (much like Hurricanes Harvey and Irma last year), regional retail sales in the Carolinas likely came to a screeching halt. There likely also was a slowdown in national sales due to the “CNN effect,” as many Americans were glued to their screens watching the tragic devastation and its aftermath rather than shopping. Although the flooding has not yet receded, at least 42 people have already been killed by Florence (one of the 10 worst storms in history), with an estimated temporary GDP hit of perhaps 0.1% to 0.3% in the third quarter.

But we believe the combination of a strong labor market, surging consumer confidence, the best BTS season in seven years and post-hurricane rebuilding activity should result in a healthy Christmas and very constructive fourth-quarter GDP, all of which will collectively help to drive the S&P 500 up to our year-end target of 3,100.

BTS is the best in seven years Despite August’s surprisingly soft 0.1% nominal sales increase, July’s strong upward revision to a gain of 0.7% translates into average retail sales for each of the two months of $508.8 billion, a powerful 6.7% y/y gain over the same two months in 2017, which represents the best start to the BTS season since 2011’s 7.7% increase. By comparison, retail sales during July and August combined rose 3.7% in 2017 and only 2.2% in 2016.

A peek into Christmas sales Christmas retail sales are usually 80-90% positively correlated with BTS results, excluding extreme weather problems. Our aforementioned rule of thumb suggests that Christmas sales could rise 5.4-6% this year, slightly above Deloitte’s 5-5.6% estimate. In 2017, by comparison, retail sales for November, December and January collectively rose 5.1%, as we enjoyed the best Christmas in six years (since 2011’s 6.3% y/y gain). Because consumer spending accounts for 70% of GDP, holiday sales are an important driver of fourth-quarter economic growth, and we recently raised our estimate here at Federated from 2.8% to 3.3%.

Labor market strong Initial weekly unemployment claims fell to 201,000 for the survey week that ended Sept. 15, a new 49-year cycle low. Last month, average hourly wages soared at their fastest pace in nearly a decade by 2.9% y/y, while the labor impairment rate (U-6) fell to a new 17-year low at 7.4%. The Job Openings and Labor Turnover Survey (JOLTS) posted a record 6.939 million job opening in July—there are now more available job openings than unemployed Americans who could fill them. Also, a record 3.58 million Americans quit their jobs in July, as the quits rate rose to a 17-year high of 2.4%.

Business and consumer confidence remain strong Many of the metrics that we follow are at or near multi-decade cycle highs:

  • Leading Economic Indicators (LEI) index has increased sequentially for 24 consecutive months to August 2018’s 111.2, a new all-time 58-year cycle high.
  • University of Michigan’s Consumer Sentiment Index leapt to 100.8 in September 2018, just off its 13-year high of 101.4 last March. The expectations component climbed to a new 14-year high.
  • Conference Board’s Consumer Confidence Index surprisingly soared to a new 18-year cycle high of 133.4 in August 2018, as post-election confidence has surged from a cycle trough of 100.8 in October 2016.
  • National Federation of Independent Business (NFIB) small-business optimism index rose to an all-time 44-year high of 108.8 in August 2018, up sharply from its cycle trough of 94.1 in September 2016.
  • ISM manufacturing index surged to a new, much stronger-than-expected 14-year high of 61.3 in August 2018, up sharply from a contraction reading of 49.4 in August 2016.

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