Consumer bounce Consumer bounce http://www.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\credit-cards-woman-small.jpg October 16 2020 October 16 2020

Consumer bounce

A strong end to Back-to-School sales bodes well for the holiday shopping season.

Published October 16 2020
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Bottom line Retail sales expanded for the fifth consecutive month in September by its fastest month-over-month (m/m) pace since June, as consumers finished their Back-to-School (BTS) shopping with a flourish. This bodes well for the elongated holiday shopping season that started this month. 

Nominal retail sales were much stronger than expected in September with a m/m gain of 1.9% (more than double the consensus forecast for an 0.8% increase), compared with gains of 0.6% in August and 1.1% in July. We had enjoyed unsustainable outsized gains of 8.6% in June and a record 18.3% in May, as the economy was rebounding from the shutdown in March and April.

Control retail sales, which strip out food, gas, autos and building materials, and which feed directly into quarterly GDP data, soared 1.4% m/m in September—nearly five times the consensus forecast for a 0.3% increase. That compares with a downwardly revised decline of 0.3% in August and a healthy gain of 1.2% in July. Control sales surged 6.1% in June and 10.4% in May.

BTS solid This important retail sales season rose a solid 3.6% on a y/y basis in 2020. Comprising the back half of July, all of August, and the first half of September, BTS is the retail industry’s second most important season and can provide an early look into upcoming Christmas sales. 

Leading categories last month include:

  • Non-store retailers (e-commerce) rose 0.5% m/m and 27% y/y (Deloitte forecasts a 25-35% y/y gain for Christmas, compared with 14.7% in 2019)
  • Building materials and furniture increased 0.6% and 0.5% m/m, respectively, and 23.4% and 7.5% y/y
  • Motor vehicles and parts leapt 3.6% m/m and 14.1% y/y
  • Sporting goods soared 5.7% m/m and 18.3% y/y
  • Clothing leapt 11% m/m, but declined 12% y/y

Savings rate and stimulus fuel spending Although the $600 weekly unemployment bonus expired at the end of July, which may have impaired August retail sales, President Trump’s $300 weekly bonus kicked in last month, which may have helped to goose September results. Congress and the administration remain at loggerheads over a Phase 4 fiscal stimulus package. In the interim, consumers have been drawing down their savings to fuel their consumption, as the savings rate has declined from a record 33.6% in April to 14.1% in August.

A better Christmas in store? Christmas retail sales are usually 80-90% positively correlated with BTS results, excluding the impact of extreme weather. But with mask-wearing and social-distancing the norm, consumers are reluctant to visit a crowded mall. So retailers are spreading out Christmas as best they can, starting the season in earnest in their physical stores at the beginning of October and emphasizing online sales. This week, Amazon, Target and Walmart, among others, hosted prominent online sales events. FedEx and UPS have increased their seasonal hiring, by 70,000 and 100,000 employees, respectively, to deliver more holiday packages.

Deloitte is forecasting a relatively muted 1-1.5% increase in Christmas sales in 2020, compared with a more typical 4.1% increase in 2019. However, with the much stronger-than-expected 3.6% increase in BTS sales this year, perhaps Deloitte’s more optimistic high-end forecast of a 2.5-3.5% increase—rather than their low-end forecast of breakeven to a muted 1% gain—will be more accurate. 

Housing and autos doing gangbusters New and existing home sales both soared to 14-year highs through August, due to low mortgage rates and strong demand, to annualized unit sales levels of 1 million and 6 million homes, respectively. From their cycle peak at 16.83 million annualized vehicles sold in February, auto sales plunged to 8.58 million units in April. But they have since recovered by 90% to 16.34 million vehicles in September. The powerful momentum in these two important categories has helped to spark strong growth in building materials, furniture, autos and gasoline over the past several months.

Labor market healing Continuing unemployment claims have now declined 60% from their peak at 24.9 million 21 weeks ago on May 9 to this week’s 10 million, while the unemployment rate fell to 7.9% in September from its record peak of 14.7% in April. In sharp contrast, it was at a half-century low of 3.5% in February. So the labor market has now recovered roughly half of its deficit over the past six months.

Business and consumer confidence continue to rebound from recession troughs:

  • Michigan Consumer Sentiment Index was sitting at a 2-year high of 101 in February 2020 before plunging to a 9-year low of 71.8 in April. But it has rebounded to a 6-month high at 81.2 in October
  • Conference Board’s Consumer Confidence Index was sitting at a 7-month high of 132.6 in February 2020. The index plunged to a 6-year low of 85.7 in April, but it has since surged to a stronger-than-expected 101.8 in September, its most powerful m/m rebound in 17 years
  • National Federation of Independent Business (NFIB) small-business optimism index was sitting at a 3-month high of 104.5 in February 2020. It plummeted to a 7-year low of 90.9 in April, but it has since nearly round-tripped to a stronger-than-expected 104 in September
  • NAHB Housing Market Index of builder confidence surprisingly leapt to a new record high of 83 (dating back to 1985) in September 2020 due to lower mortgage rates and strong demand. It plunged to 30 in April 2020 due to the coronavirus, marking the single-largest m/m decline on record and the lowest level since June 2012

Inflation starting to normalize We continue to believe that the deepest recession in U.S. history ended in May or June, so we’re just waiting for the National Bureau of Economic Research (NBER) to officially date its conclusion. As the economy has recovered sharply from its April trough, inflation has also bottomed, and is now approaching more normal levels:

  • Core CPI dropped from 2.4% in February to 1.2% y/y in both May and June, and has since rebounded to 1.7% in both August and September
  • Core PCE fell from 1.9% in February 2020 to 0.9% in April, which is a 10-year low, and it has since rebounded to a stronger-than-expected 1.6% in August. To be sure, core inflation remains below the Fed’s long-standing 2.0% target. But the Fed will now allow core PCE to average 2% over time, by temporarily allowing it to increase up to 2.25-2.50% before raising rates again

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Tags Markets/Economy . Equity .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

The Conference Board's Consumer Confidence Index measures how optimistic or pessimistic consumers are about the economy.

Consumer Price Index (CPI): A measure of inflation at the retail level.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

The National Association of Home Builders/Wells Fargo Housing Market Index is a gauge of how well or poorly builders believe their business will do in coming months.

The National Federation of Independent Business (NFIB) conducts surveys monthly to gauge how small businesses feel about the economy, their situation and their plans.

Personal Consumption Expenditure (PCE) Index: A measure of inflation at the consumer level.

The University of Michigan Consumer Sentiment Index is a measure of consumer confidence based on a monthly telephone survey by the University of Michigan that gathers information on consumer expectations regarding the overall economy.

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