October 4, 2011
I advanced the position recently that flat August retail sales were mainly the result of various transitory events, principally the recognition that the U.S. government is now defunct, rather than a further weakening of the economy. It was my view that going into the third quarter, the economy started to show some signs of life following a very challenging first half (i.e., June retail sales +0.2 percent; July retail sales +0.3 percent). Therefore, as several of these transitory events have come and gone, it is logical to conclude that September retail sales should show a bit of an upswing.
On October 14, September retail sales will be released. We look for a slight improvement, up 0.2 percent. The most ominous economic threat – the EU debt crisis – does not really concern the average U.S. consumer. It will, however, potentially impact more affluent consumers due to the hit to their net worth that this uncertainty has caused. The following Chart 1 of the Dow Jones Industrial Average for the first three quarters of this year illustrates the market’s wild gyrations. Unless the worst happens in Europe, declining gas prices will have more of an impact on consumer psyches (see Chart 2) and spending.
Source: Fidelity Investments
Some bad news first:
August retail sales were unchanged versus July (but up 7.2 percent versus last August).
Personal income fell 0.1 percent in August (but up 4.5 percent versus last August).
Inflation-adjusted weekly earnings have fallen for six straight months (down 1.8 percent versus last August).
Some not-so-bad news:
The index of mortgage applications increased by 9.3 percent last week, following a 10.0 percent rise during the prior week. Applications have risen more than 80 percent since this year’s low.
Personal consumption expenditures rose 0.2 percent in August (up 4.7 percent versus last August); at a 0.7 percent annual rate for the second quarter (but less than half of the 2.1 percent annual rate for the first quarter).
The University of Michigan's Index of Consumer Sentiment for September rose to 59.4, versus 55.7 in August (but down 12.9 percent versus last August).
Initial claims for jobless insurance dropped by 37,000 to 391,000,000 last week from 428,000, the lowest since the first week of April.
GDP for the second quarter was revised up to 1.3 percent from the 1.0 percent reported a month ago.
Absent the EU crumbling, we are starting to see a slight improvement in the things that matter most, that is, jobs, housing, and spending. As we look at the data, we see weak-to-subpar growth. Stagnant wages may limit spending to necessities, leaving the luxury brands a bit more at risk. September should show a slight increase in retail sales, a continuation of slow but modest growth. And that story won’t make headlines.
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