Look beyond the headline
The bump in April retail sales belies a deceleration of consumer spending.
Nominal retail sales rose for the first time in three months and for only the second time in six months in April. While the 0.4% month-over-month increase is below the consensus call for 0.8%, it’s materially better than the consecutive declines in March and February of -0.7%. Control results—which exclude food services, gas stations, auto dealers and building materials stores—were stronger, important as they feed directly into quarterly GDP calculations. This grouping climbed by a better-than-expected 0.7% in April, compared to a decline in March (-0.4%) and no change in February.
Easter salvages April results The fact that Easter landed later than typical this year (April 9) might account for some of the robust results in general merchandise sales and the shift from goods to services (especially at bars and restaurants) in April compared to March. Because of the annual calendar rotation of Easter and Passover, we routinely combine these months and compare the results to the previous year. “Mapril” retail sales rose a tepid 2% on a year-over-year (y/y) basis compared with solid 8.6% growth during the same two months in 2022. To be sure, that pales by comparison to the outsized 39.5% retail sales rebound in 2021 versus depressed 2020 results, which plunged by -12.9% at the depth of the pandemic. A more reasonable comparison, then, comes with the average of Mapril sales growth of 4.3% over the past 20 years, a range of 2% to 6.7%. So this year’s 2% growth lies at the lower bound.
Is slower Mapril a forecast? This duo is the third most important season for retail sales. Consumer spending has decelerated sharply over the past three Maprils, from gains of 39.5% y/y in 2021 to 8.6% in 2022 to this year’s weak 2%. Back-to-School (BTS) spending (June through September) slowed from a strong 14.7% y/y gain in 2021 to 9.7% in 2022. Christmas (October through January) slowed from a 15.2% gain in 2021 to 7.1% in 2022. The three retail-sales seasons tend to be 80-90% positively correlated. So the recent plunge in Mapril spending suggests the growth in consumer spending in the second half of this year could also hit single digits. Consumer spending accounts for 70% of GDP, and our muted forecast for BTS and Christmas spending contributes to our forecast for negative GDP growth prints in the third and fourth quarters of 2023.
Business and consumer confidence falling:
- NFIB Small Business Optimism Index fell to a 10-year low of 89 in April.
- Conference Board’s Consumer Confidence Index plunged from 109 in December 2022 to 101.3 in April.
- University of Michigan’s Consumer Sentiment Index decreased from 67 in February to 57.7 in May, with inflation expectations hitting a 12-year high.
- Leading Economic Indicators (LEI) Index, a remarkably reliable signal over each of the past seven recessions, has now declined 13 months in a row through April 2023.
Savings rising The personal savings rate has averaged 6.6% over the past 30 years, but has fluctuated substantially in recent years. It reached a staggering 26.3% in March 2021 as Covid shutdowns and overly generous stimulus payments filled coffers. Perhaps predicably, it slipped as the opening economy met pent-up demand, tumbling down to a 17-year low of 2.7% in June 2022. But over the past nine months, the rate has rebounded, hitting 5.1% in March. This suggests consumers are spending less and saving more, perhaps concerned about the growing risk of recession.
Moreover, excess savings have plunged 70% over the past 18 months from that stimulus-laden $2.3 trillion in the third quarter of 2021 to $690 billion in March 2023. Credit card usage soared by 17% last year, and credit card delinquencies have surged from 1.6% in the third quarter of 2021 to 2.2% in the fourth quarter of 2022, trends we expect to continue.
Consumers trading down While the high-end shopper is still faring well, the mid- and low-end consumer has been actively trading down over the past year. Many are heading to discount stores, buying cheaper store brands and seeking discounts and promotions.
K-shaped recovery widens Historically, the top 20% of America disproportionately accounts for 40% of consumer spending, while the bottom 40% accounts for only 20% of spending. So it’s likely the relatively flush high-end consumer who has been keeping retail sales afloat.
The unemployment rate (U-3) of 3.4% is a 53-year low. But the rate for high-wage-earning workers declined to 1.9% in April from 2% in March (just above September 2022’s cycle low of 1.8%). However, the unemployment rate for low-wage-earning workers soared from 4.8% in March to 5.4% in April (versus its 30-year low of 4.3% in February 2022). We suspect these employees are tightening their purse strings.