Sales surprisingly surge
Back-to-School sales were soft, but consumers are spending elsewhere.
Bottom Line
Headline retail sales in September were much stronger than expected, rising 0.7% month over month (m/m), more than double consensus expectations for a 0.3% gain. August was revised up from a preliminary 0.6% m/m gain to an 0.8% increase; July ticked up from a 0.5% increase to a 0.6% final gain; and June rose by 0.2%. These collectively helped to increase spending during the important Back-to-School (BTS) season (June through September) to a 2.7% year-over-year (y/y) gain in 2023 versus 9.8% in 2022, a sharp improvement over the 2.1% y/y increase registered through August 2023.
Control results (which exclude spending on food, gas, autos and building materials, and are a direct input into the Commerce Department’s GDP calculations) were also better than expected in September, soaring 0.6% m/m (consensus was for 0.1%); August’s preliminary gain of 0.1% m/m was doubled to a 0.2% increase; July control results ticked up from an increase of 0.7% to an 0.8% final gain; and June rose 0.3%.
Why is Back-to-School a 4-month retail sales season? BTS begins in June, so college students can buy electronics, apparel and dorm-room furnishings. While July and August are the heart of BTS season, many parents and students hold onto some of their apparel budget until September to see what fashions are popular and to take advantage of Labor Day sales.
What worked this year? Perhaps due to strike FOMO, auto sales leapt 1.0% m/m in September, their largest gain in four months. While retail gas prices were only marginally higher at $3.84 per gallon (up 0.1%) during September, gasoline station sales surged 0.9% m/m, largely due to increased volume from continued “revenge travel.” Likewise, spending in restaurants and bars rose 0.9% m/m. Finally, online sales soared 1.1% m/m.
What didn’t work? The more typical BTS categories performed poorly in September. Electronics and clothing both declined -0.8% m/m, while spending in department stores and on sporting goods were each breakeven. In addition, the ongoing housing recession has hurt sales of building materials. They declined -0.2% m/m, while furniture sales were breakeven.
If people have jobs, they will shop The labor market remains strong. The October survey week for initial weekly jobless claims checked in this week at a 9-month low of 198,000 claims. Nonfarm payrolls surged by a much stronger-than-expected 336,000 jobs in September, marking the largest monthly gain since January. Also July and August gains were revised higher by a combined 119,000 jobs. That means payroll employment soared by a sizzling 455,000 jobs last month (versus 170,000 consensus).That’s consistent with the ongoing JOLTS report, which surprisingly leapt in August to more than 9.6 million job openings.
What does this mean for Christmas? Retail sales during the Easter “Marpril” season (March and April combined) rose 1.7% y/y in 2023 versus a much stronger 8.6% gain during Marpril 2022. BTS spending rose 2.7% y/y in 2023 compared with a strong 9.8% y/y gain during the 2022 season. The three important annual retail sales seasons—Marpril, BTS and Christmas—share a 73% positive correlation over the past 30 years. Personal consumption accounts for 70% of GDP. Christmas 2022 rose a solid 7.1% y/y, but we may see a subpar 3-4% y/y gain in 2023.
Business and consumer confidence has weakened:
- Leading Economic Indicators have been negative 18 months in a row through September’s -0.7% m/m decline, a pattern consistent with the last seven recessions over the past half century.
- Michigan Consumer Sentiment Index surged to a two-year high of 71.6 in July 2023 over the last year from a 44-year low of 50.0 in June 2022. But the index fell to a surprisingly weak 63 in October.
- Conference Board’s Consumer Confidence Index leapt to a 19-month high of 114.0 in July 2023 from a 17-month low of 95.3 in July 2022. But the index plummeted sharply to 103 in September, and it’s expected to continue to decline to 100 in October.
- NAHB Housing Market Index of builder confidence soared to a one-year high of 56 in July 2023, up sharply from a nearly three-year low of 31 in December 2022. But the index plunged to 40 in October 2023, due to a recent surge in mortgage rates to 8%, more than double their 3.5% trough in 2021.
- National Federation of Independent Business (NFIB) small-business optimism index rebounded to an eight-month high of 91.9 in July 2023, up from a 10-year low of 89.0 in April 2023. But the index declined to 90.8 in September.
Higher for longer Over the past year, the Federal Reserve has shrunk its balance sheet from $9 trillion to $8 trillion while hiking the fed funds rate from near zero to a range of 5.25-5.5%. That restrictive policy was appropriate, given elevated food, energy and shelter prices and amid rising wages. We could see another quarter-point rate hike (perhaps December 13 or January 31); we do not expect the Fed to begin cutting interest rates before the second half of 2024.
From an overbought 3.25% in April 2023, 10-year Treasury yields reached an oversold, 16-year high of 5% yesterday. So, the Fed may decide it can hit the pause button earlier than we are expecting as the bond market has done much of the heavy lifting for it to slow the economy and reduce inflation. Regardless of the source, however, higher interest rates could pressure business and consumer spending.
Personal savings rate rises from 17-year low The personal saving rate spiked from 8.3% pre-pandemic in February 2020 to a record 32% in April 2020 and to 26.1% in March 2021, due to generous fiscal stimulus benefits from President Trump’s CARES Act and President Biden’s American Rescue Plan, respectively. But the personal savings rate plunged to a 17-year low of 2.7% in June 2022, well below the 30-year average of 6.6%. The savings rate trough is 2.1% in July 2005. Over the past 14 months, however, the savings rate has risen to 3.9% in August 2023, as consumers appear to be concerned about the rise in the unemployment rate from a 53-year low of 3.4% in April 2023 to 3.8% in September.
Excess savings have dwindled to $620 billion in August 2023, from their peak of $2.2 trillion in September 2021. At that pace (about $69 billion monthly), we expect these excess savings to be fully depleted by May 2024.
Student loan payments return in October Some 40 million borrowers began to repay an average of $400 per month starting this month. Although this amounts to less than 1% of GDP annually, it may disproportionately impact some lower-end borrowers, reducing their discretionary spending.
Credit card usage and delinquencies rise Card usage increased 11.3% in September 2023 from a year ago, while delinquencies have soared to 2.8% in June 2023, nearly double the 1.5% rate at the bottom of the cycle in September 2021.