US Consumer Update: Continuing to Drive Economic Growth.
Today’s July retail sales report was unchanged but still consistent with the theme of strong consumer resilience continuing in Q3 2016. The headline print at 0% was below Bloomberg expectations of 0.4%. Digging into the retail categories, it seems auto sales took away demand from other retail categories. Surprisingly, non-store retailers’ sales grew same as June, despite the Amazon “Prime Day”.
The US Consumer continues to be the driver of economic growth. Much of the rise in the preliminary Q2 2016 GDP release late last month came from consumption growth of +4.2%. Although the strength in consumer spending growth continues, it’s questionable if it’s sustainable if wage growth remains sluggish.
We believe that a better measure of consumer spending is Retail Sales & Food Services Excluding Auto, Gas Stations & Building Materials that is less volatile and is used in GDP calculations as it proxies the consumption growth rate. This measure was also unchanged.
The University of Michigan Consumer Sentiment was still above average at 90, even though it declined 3.5 points vs. June, similar to the change in other measures of sentiment such as the Conference Board Consumer Confidence. Both these measures show that confidence levels are high and consistent with solid growth in consumer spending.
Claims released on Thursday (8/11) remained low at 266K and very close to consensus of 265k, continuing the trend of strong employment growth. Claims are now close to 4-decade lows.
Productivity growth released on Tuesday (8/9) for Q2 2016 at -0.5% was well below consensus of +0.4%. This was unsurprising as weak productivity growth is the piece of the puzzle that is holding down GDP growth despite labor market strength.
The Fed is watching this week’s data releases to paint a holistic picture of the labor market and consumer sector before the next meeting on Sept. 20-21. Robert Kaplan (Dallas Fed) recently said “We believe the consumer will still be strong in 2016, but it makes us also be very watchful for the next number of data releases to see what trend we’re on”.
The Fed’s Labor Market Conditions Index (LMCI), which combines 19 labor market indicators including quit rate, wages and part-time workers improved on a strong payrolls report for July & revisions to June numbers. The LMCI Index posted the first gain after four consecutive months of weakening until May 2016.
Astor’s View
We believe that despite the slow wage growth, household balance sheets have strengthened from both the market rally this year and higher housing prices. While we still see consumer spending as a positive contributor to economic growth, the improvement in labor income will be key to determine the trends in consumption for the remainder of 2016.
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