Retail sales slow
Quirky back-to-school shopping contributed.
Bottom line Retail sales grew for the fourth consecutive month in August, but the pace slowed–with a downward revision for July–which suggests the consumer recovery is normalizing following May and June’s powerful rebound.
Nominal retail sales in August were weaker than expected, with a month-over-month (m/m) gain of 0.6%, as the speed of the recovery has eased from gains of 0.9% in July, 8.6% in June and a record 18.3% in May. While we’re certainly making good progress from April’s record 14.7% decline, the outsized recovery in May and June was simply unsustainable, particularly with the expiration of the $600 per week unemployment bonus at the end of July.
“Control” retail sales, which strip out food, gas, autos and building materials and feed directly into quarterly GDP data, actually declined by a weaker-than-expected 0.1% in August, compared with gains of 0.9% in July, 6.1% in June and 10.4% in May. Control sales plunged 12.4% in April at the trough of the cycle.
Quirky BTS The important Back-to-School (BTS) retail sales season, which comprises the back half of July, all of August and the first half of September, is the retail industry’s second most important and often provides an insightful look into upcoming Christmas sales.
Electronic sales rose a relatively modest 0.8% in August, but they were frontloaded by enormous m/m gains of 20.7% in July, 38.5% in June and 24.6% in May, as families prepared for an extended period of sheltering-in-place by purchasing computers, games and smart phones. Clothing sales rose 2.9% in August and 2.2% in July, as students prepared to attend some classes in person. But that pales in comparison to gains of 99.7% in June and 180% in May, as consumers prepared for a more casual stay-at-home wardrobe.
Non-store retailers (e-commerce) were unchanged in August and rose only 0.3% in July, down sharply from gains of 7.7% and 9.4%, respectively, in May and April. That was offset by solid gains of 4.7% and 4.1% at eating and drinking places, respectively, in August and July, as consumers with cabin fever began to venture out again to bars and restaurants. Finally, with the housing market on fire this summer, furniture and building materials rose 2.1% and 2%, respectively, in August, which may have siphoned some sales away from traditional BTS categories.
A peek into Christmas? Christmas retail sales are usually 80-90% positively correlated with BTS results, excluding the impact of extreme weather problems. But we can probably throw that old bromide out the proverbial window this year, thanks to the coronavirus. With mask-wearing and social-distancing guidelines still in place, consumers remain wary about heading to a crowded mall. So retailers will be spreading out the Christmas season as best they can, and are expected to start selling in earnest at the beginning of October.
Deloitte is forecasting a relatively muted 1-1.5% overall increase in Christmas sales in 2020, compared with a more typical 4.1% increase in 2019. But e-commerce sales should surge, as Deloitte is forecasting a 25-35% year-over-year (y/y) gain, compared with 14.7% in 2019. As a result, FedEx and UPS are significantly increasing their seasonal hiring, by 70,000 and 100,000 employees, respectively, to deliver more holiday packages. Because consumer spending accounts for 70% of GDP, holiday sales are an important driver of fourth-quarter economic growth, and we recently trimmed our estimate here at Federated Hermes from 11.2% to 8.9%.
Inflation has bottomed We believe the recession ended in May or June, and we’re just waiting for the NBER to officially date it. As the economy is recovering from its April trough, inflation also has bottomed, and even is starting to grind higher:
- Core CPI dropped from 2.4% in February to 1.2% y/y in both May and June, and has rebounded to 1.7% in August.
- Core PCE fell from 1.9% in February 2020 to 0.9% in April, which is a 10-year low, and has since bounced to 1.3% in July. While core inflation remains below the Federal Reserve’s long-standing 2% target, policymakers have announced they now will allow core PCE to temporarily rise above that level before raising interest rates again.
Labor market recovering Initial weekly unemployment claims have now fallen 87% over the past 24 weeks from their peak at nearly 6.9 million claims on March 28, to this week’s reading of 860,000. Continuing claims have now dropped by 49% from their peak at 24.9 million 17 weeks ago on May 9, to this week’s 12.6 million. In addition, the household survey added a stunning 3.8 million jobs in August, nearly triple July’s gain of 1.35 million jobs. So the labor market is now roughly halfway home in recovering from its massive hole. Part of that rapid recovery may be due to the expiration at the end of July of the $600 per week unemployment bonus, as Congress is unable to agree on an extension, and people are returning to work to support their families.
Business and consumer confidence continue to rebound
- 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. This index had 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.
- Leading Economic Indicators (LEI) index collapsed in March and April amid the pandemic, taking the LEI down to 97.0, a 6-year low. But this metric has rebounded strongly over the past four months, rising this morning by 1.2% in August to 106.5, although the LEI remains below its 61-year cycle high of 112.0 in January 2020. August results were juiced by jobless claims, ISM new orders and stock prices.
- Michigan Consumer Sentiment Index plunged to a 9-year low of 71.8 in April, but it has surprisingly rebounded to a 6-month high this morning at 78.9 in September. Michigan was sitting at a 2-year high of 101 in February.
- National Federation of Independent Business (NFIB) small-business optimism index was sitting at a 3-month high of 104.5 in February 2020, but it plummeted to a 7-year low of 90.9 in April. It has since bounced back to a stronger-than-expected 100.2 in August.
- Conference Board’s Consumer Confidence Index was sitting at a seven-month high of 132.6 in February 2020. Although the index fell to a 6-year low of 84.8 in August 2020, due to pandemic-related concerns about employment, income and business conditions, the Bloomberg consensus is expecting a rebound in September to 87.5.