“I think the consumer generally is okay. There’s things that are working in his favor. whether it’s interest rates, fuel prices, unemployment rate…I think there’s still probably little bit of hesitancy and that stems even back from ‘09 and ‘10 when people remember a tougher time…You continue to see a little bit of that.”–Walmart CFO Brett Biggs
August: Start of a Down Trend
Moneyball Vice data: Spending Is Inflecting Down
Over the Summer, retail sales data strongly diverged from Moneyball’s Vice data: The official data pointed to a sharp burst of spending. The Vice data showed no acceleration. Recent revisions to the official data removed the surge and the official data re-converged with Moneyball.
(Regular Moneyball readers know the Vice Index is the best way to gauge the American consumer. It’s proprietary research I conduct to track discretionary spending in real-time.)
The Moneyball Vice data reliability matters especially now: it’s now predicting a prolonged downturn in retail spending.
Recall that Vice data tracks broad-based forms of luxury spending in the United States. And luxury spending is the canary-in-the-coal-mine for discretionary spending.
If the narrative is shifting to slower luxury spending, then expect that to trickle through to normal discretionary spending. Discretionary spending is always the next domino to fall.
But let’s step back for a moment. It’s very reasonable to expect slower retail sales growth. To begin with, there is market saturation and the consequent shift in spending. U.S. consumers have the toys and cars that they need… so they are spending on experiences over things. And retail sales figures don’t include vacation spending.
That’s the good news: the consumer is still spending, just changing focus. The bad news is that Vice data says that actual spending will drop a bit in the coming months.
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And here’s a critical point: Moneyball’s Vice data is lagged. I picked up on the pullback at the start of summer.
Spending on vice’s leads spending on regular retail by four months.
An August drop in retail spending was predicted by the April drop in vice spending. And that drop in vice spending immediately followed a sudden downshift in compensation growth that started in the first quarter (Q1).
It’s the slow-motion crashing of dominos.
By the way, that downshift in income growth came with a noticeable downshift in the overall economy: payroll growth slowed, GDP barely budged, and so on. Meanwhile, 401Ks are barely growing.
(Seeing a lack of tailwinds, consumer sentiment has turned decidedly less bullish. And the Vice data is seeing that follow-though into the second half (2H) spending. As we head into October, consumers are hesitant to spend beyond last year’s budget).
By the way, I was one of the few forecasters to predict the recent pullback in retail Spending.
August: Beyond the Usual Mean Reversion
US consumer spending follows a familiar pattern: a general growth trajectory punctuated by big jumps around holiday time. The key holidays being “Spring break,” July 4th, and Christmas.
We’ve all been there: we time the splurge and then retreat back into our normal spending patterns. The pattern we expect to see in the data is for spending after these holidays to revert back to the prior trajectory.
For confirmation of this behavior, look no further than the monthly changes in revolving consumer credit (aka credit card spending).
Note that August reverts to the mean following the July 4th surge. (Credit card surges track the timing of the holidays, which shift a bit each year. Last year’s Spring Break was spread out between March and April. And July 4th on a Monday will move spending into June, before the weekend parties’ kick-off.)
This year, the usual August mean reversion will overshoot:
– Amazon Prime day pulled sales into July
– Auto & Truck sales fell in August
– Delayed smartphone purchases
Issue #1: Amazon Prime Day
Amazon Prime Day generated ~ billion (B) in incremental retailer sales as everyone piggybacked on the event. It’s a new Black Friday.
But it also pulled in sales from August. Especially back-to-school retail sales. Per Cardlytics, last year saw consumers pull back-to-school spending from late August into the July Prime Day.
This year saw even more sales and even more retailers participating. That will spell a fall-off in the August retail sales.
Issue #2: Smartphone Spending Dropped
Consumer spending on smartphones has not budged due to the anticipation of the September iPhone release.
Issue #3: Auto Sales Drop
The retail sales model has a problem: it ignores drops in sales volumes. The chart below tracks sales in unit and dollar ($) terms. Volume contractions are shaded in red. In 2014 and 2015 unit sales contracted six times and sales pulled back once.
In fact, notice that 2016 sales have been drifting down almost every month, but somehow the Retail Sales numbers continue to rise. The divergence is very stark: Unit sales are (-4%) below last year’s, but up +2% in dollar terms.
It’s impossible to rationally explain the divergence. Sales prices aren’t growing. According to Truecar, prices per car rose 1.3% year-over-year but incentives rose even faster and eliminated the growth. In other words, net prices have been flat while volumes fell. Nevertheless, retail sales just keep moving up.
In any event, this months units contracted sharply and I modeled in my forecast a __spamspan_img_placeholder__.8B drop in retail light vehicle sales. Turned out the official data said it dropped __spamspan_img_placeholder__.85B. The fact that it dropped at all was the issue. Even if the drop was minuscule compared to the real world level of auto sales falloff.
Basically beware the data: official data is frequently disconnected from reality because it is all modeling based. It’s theoretical until the real data rolls in….a year from now.
Key point: The retail data (flawed as it is) reflects consumer spending that continues to expand. Look past the minutiae of month-to-month gyrations and you will see that the absolute level of spending continues to grow.
But it’s slowing down. Overall, compared to last year, total spending is running just above the rate of inflation. And more critically, the mad money spending – food and drinking services – is slowing very fast.
That fits the Moneyball Vice data which adds that the spending in absolute dollars is about to flatten as well, and possibly turn negative for a brief period.
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