US consumer found wanting - Westpac
According to Elliot Clarke, Research Analyst at Westpac, a run of disappointing retail sales prints has raised questions over the US consumer and while the weather has certainly been a factor, but the challenging financial position of the US consumer is also significant.
Key Quotes
“There has been an expectation amongst some market participants that the US consumer would lead aggregate growth in 2018, bolstered by strong confidence; continued strength in employment; and tax cuts. However, to date, this has not proven to be the case, with retail sales declining in January and February.”
“In February, against market expectations for a 0.3% gain, total retail sales instead fell 0.1%. There was however a revision to the prior month, the initially reported 0.3% decline revised to –0.1%. Looking at the detail of the release, the two key negatives in February were auto sales (–0.9%; the second successive decline of this size) and gasoline sales (–1.2%; reversing a 1.9% gain in January). Both of these outcomes can be justified by the weather: auto sales are still coming down from an abnormal level after the 2017 hurricane season; while the cold weather seen through February 2018 would have kept more people at home than is typically the case. (Note, February’s weather would have also weighed on other forms of store retailing, with consumers instead likely to shop online or delay spending to March.)”
“Focusing on core retail sales (which exclude autos and gasoline), the momentum seen in February was more positive, +0.3%. This is not a strong outcome by any means, particularly as it follows a –0.1% result in January. But it does indicate that the consumer remained willing to spend in the first quarter of 2018.”
“Thinking ahead to the remainder of 2018, it is likely the case that consumer growth will strengthen. However, it is unlikely to be to the degree anticipated by the optimists. Priced into our growth forecasts is an average 2.2% annualised gain through 2018, down from 2.8% annualised in 2016 and 2017. While we anticipate services spending will continue at the same pace as the prior two years, and non-durables spending to also be broadly in line, growth in durables spending (particularly auto purchases) is likely to be more subdued.”
“While it is certainly the case that US households have received a windfall from the tax cuts of December 2017, both directly and indirectly as corporates use some of their tax savings to boost wages, growth in per capita real disposable income remains weak versus history. More broadly on wages, hourly and weekly earnings (as per the payrolls survey) are only keeping pace with inflation.”
“For the most part, US consumers also have little wealth to spend from. The savings rate has been at or near its historic low since the end of 2016. And we know from the skew of financial asset ownership towards the wealthy that accrued wealth and capital gains are not something that the ‘median’ household has a lot of. It is also worth emphasising that, based on the household debt to income trend and declining home equity loan balances, consumers remain unwilling to borrow against their property to fund consumption.”
“That then brings us to the looming risk for household spending: rising interest rates. Up until late 2017, term interest rates in the US remained at historically low levels. This supported purchases of housing and, as above, auto sales.”
“However, given the recent rise in the 10yr Treasury yield (which acts as a benchmark for many market rates) and the expectation of more to come (we see the 10yr up another 70bps at 3.50% by March 2019), there is a clear risk that borrowing to purchase will become too expensive for many households.”
“All told, while the consumer has received a windfall from tax cuts, this is unlikely to be enough to drive consumption equal to or in excess of that seen in recent years. A marked acceleration in real wage growth would change this situation materially. But in its absence, the US consumer is likely to disappoint through 2018 and beyond.”