Solid 'Mapril' retail sales
No recession on the immediate horizon.
Nominal retail sales rose a solid 0.9% month-over-month (m/m) in April, and the Commerce Dept. revised March results up sharply, from a preliminary 0.5% m/m gain to 1.4%. Control results—which exclude food services, gas stations, auto dealers and building materials stores, and which feed directly into quarterly GDP calculations—were similarly solid. They rose a stronger-than-expected 1% in April (consensus at 0.7%), while March results were revised briskly higher to a gain of 1.1%, up from a preliminary decline of 0.1%.
'Mapril' results solid Because of the annual calendar rotation with Easter and Passover, we routinely look at the months of March and April combined and compare their results to the same two-month, year-ago period. The combination of March and April this year (Mapril 2022) rose a healthy 7.8% on a year-over-year (y/y) basis compared with the same two months in 2021. But that pales in comparison to the outsized 41% y/y retail sales rebound in Mapril 2021 versus depressed 2020 results, which had plunged by 13% y/y at the depth of the pandemic.
A more reasonable comparison, in our view, is to look at the pre-pandemic Mapril y/y comparisons during the 7-year period from 2013 through 2019, during which time retail sales rose an average of 3.5% annually, within a range of 2% to 4.8% gains. In that context, then, this year’s 7.8% y/y gain is relatively good.
Slower than Christmas and Back-to-School But the 7.8% pace of growth for Mapril 2022 has slowed from a powerful 16.4% y/y gain for Christmas 2021 (October 2021 through January 2022) and from an equally strong 16.3% Back-to-School increase last year (June through September 2021). The consumer appears to be on a glide path back to normalization.
Bear market territory Stocks have now declined for seven consecutive weeks for the first time since the dot-com bubble burst more than 20 years ago in March 2001, marking just the fourth such losing streak of seven or more consecutive weeks in the post-war history of the U.S. Two retail bellwethers sounded the alarm last week, as Walmart and Target told investors that they are experiencing shrinking profit margins due to increased labor, commodity and transportation costs. As investors have begun to price in this deceleration of retail sales growth and slimmer margins, the S&P 500 has now declined nearly 21% on an intraday basis from January 4 to today. Benchmark 10-year Treasury yields have also slipped from 3.15% to 2.77% over the past fortnight, as perhaps the bond vigilantes are anticipating slower economic and corporate profit growth.
Looking across the proverbial valley, however, these trends are likely to exacerbate over coming months:
Confidence sliding The University of Michigan’s Consumer Sentiment Index fell to an 11-year low in May 2022 at 59.1, and the NFIB Small Business Optimism Index fell to a 2-year low in April at 93.2. The NAHB Housing Market Index plunged 8 points to a 2-year low of 69 in May, suffering its steepest m/m decline since April 2020.
Savings rate falling The personal savings rate declined to a 9-year low of 6.2% in March 2020, down sharply from 26.6% in March 2021, which suggests that consumers have a dwindling store of dry powder to afford any further price increases, as companies attempt to pass along their own increased costs. The savings rate averaged 6.7% over the past 25 years.
Gas and food prices surging Lagging retail gasoline prices have soared 118% over the last 18 months to a record $4.59 per gallon nationally. The industry rule of thumb is that every one-penny increase in price at the pumps reduces consumer discretionary spending by $1.18 billion annually. So this will reduce personal spending by about 1.5% and overall GDP by 1% annually. The surge in gas prices is not surprising, as crude oil prices (WTI) have more than tripled from $34 per barrel in November 2020 to $113 today.
Corn, wheat, and soybeans, which are the three most important agricultural commodities in the U.S., have more than doubled in price over the past 18 months. Surging energy and food prices result in less discretionary spending, particularly for lower-income families, who disproportionately spend a greater percentage of their income to heat their homes, fill up their cars and feed their families.
Inflation remains elevated The nominal and core retail Consumer Price Index (CPI) hit 40-year highs of 8.5% and 6.5%, respectively, in March 2022. True, these metrics did ease slightly in April. But that was due to declining energy prices last month, which have since rebounded in May. We do not believe that we have seen the peak in inflation just yet.
While we think inflation will peak in coming months, as the Federal Reserve executes three consecutive half-point increases at their May, June, and July policy-setting meetings, we also believe that it could be two or three years before we see inflation back down at the Fed’s target range of around 2-3%.
Negative real wages Importantly, although average hourly earnings rose a strong 5.5% in April 2022, which was just off a 2-year high, the 8.3% increase in nominal CPI inflation means that the average worker has lost 2.8% in purchasing power. That doesn’t bode well for the pace of retail sales growth or profit margins in coming quarters.