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Are These Red Flags In Retail Sales & Consumer Debt?

This article was originally published on UPFINA.

The post Are These Red Flags In Retail Sales & Consumer Debt? appeared first on UPFINA – Pursuit of Truth in Finance & Economics.

The April seasonally adjusted retail sales report was a
major disappointment as headline monthly growth fell from 1.7% to -0.2% which
missed estimates for 0.2%. It even missed the low end of the consensus range by
0.1%. Yearly growth was 3.1% which is near the low end of this cycle’s readings
but not nearly as bad as the terrible December 2018 report. Ex-autos sales were
up 0.1% monthly and 3.3% yearly. This is better than the headline reading
because auto sales were weak as they fell 1.1% monthly. Ex-autos and gas sales
fell 0.2% which is worse than just ex-autos because gasoline station sales were
up 1.8% as they were driven by higher gas prices. The control group’s monthly
growth was the only reading that didn’t miss the low end of estimates as it was
0%. It missed the consensus of 0.4% and fell from 1.1% in March. Yearly growth was
2.9%.

Excuses For The Weak Report

One excuse for this weak report was that consumers received
lower tax refunds than they may have expected. Lower tax rates mean lower
refunds. Consumers often are subject to mental accounting bias which is when
they put money in boxes even though it is fungible. This ‘found money’ from a
tax refund is often spent right away rather than saved.

The other reason results were poor is the timing of Easter. The
holiday was on April 1st last year and April 21st this
year. That means there was more spending in March last year and this year had
more spending in April. The results are switched during the seasonal adjustment
process, but it’s possible that the adjustment went overboard.

To find out more, let’s look at non-adjusted yearly retail sales growth seen in the chart below.

Unsurprisingly, yearly growth was very weak in March as it was 1.6%. It was strong in April as it was 5%. To counteract the effect of seasonal adjustments, we can look at March and April’s 2 year unadjusted growth stack. The 2 year growth stack was 7.37% in March; it was 8.58% in April. The eye test, which tells us the jumbled data may have been catalyzed by seasonal adjustments, is correct. The Easter excuse is a valid concern.

Further Retail Sales Details

Because of the 0.1% higher revision in March retail sales, there might be an uplift in the Q1 GDP revision. That revision comes out on May 30th. Q2 GDP growth will be hurt by this April report. This report caused the Atlanta Fed Nowcast’s estimate for real Q2 consumer spending growth to fall from 3.2% to 3%. That was partially why the Q2 GDP growth estimate fell from 1.6% to 1.1% on May 15th.

Most of this report shows weakness which isn’t a surprise based
on the headline reading. It was hurt by spending on consumer electronics and
home improvements. The somewhat weak housing market has a big role to play in latter
category’s weakness. The chart below basically takes every weak part of this
report and combines it, showing a problematic result. It’s fair to call this
cherry picked data, but it’s also fair to say if the economy was strong, spending
growth in these categories would be stronger. This group’s growth also was
negative last month which had a good headline reading. Specifically, monthly
sales at electronics and appliance stores fell 1.3% after falling 4.3%. Furniture
sales were flat after falling 3.1%. Building materials sales fell 1.9% after
rising 1.2%.

Besides gasoline, there were a couple good parts to this report.
Department store sales growth was 0.7% which pushed general merchandise sales
growth up to 0.2%. Restaurant sales growth was 0.2% which builds on the 5.7%
growth in March. It would have been easy to give some of that gain back.

Q1 Household Debt & Credit Report

In the NY Fed’s Q1 report, total household debt increased from $13.55 trillion to $13.67 trillion. Don’t be fooled by the bearish investors into thinking that household debt being at a record high means the consumer is in trouble. Wealth is also extremely high because of the rise in asset prices like the stock market. For example, total debt increased from $12.68 trillion in Q3 2008 to $13.55 trillion in Q4 2018. In that period, the net worth of households and non-profits increased from $61.689 trillion to $104.329 trillion. That’s a much bigger increase than there was in household debt; the consumer has deleveraged in this expansion, as we have pointed out before.

This cycle has been driven by student and auto loans. They increased from $1.46 trillion and $1.27 trillion to $1.49 trillion and $1.28 trillion. Now let’s look at delinquency rates to check the health of the consumer. The best improvement in the chart below, which shows the percentage of balances 90+ days delinquent, was student loans which fell from 11.4% to 10.9%.

Unfortunately, the percentage of loans in transition to 30+ day and 90+ day delinquency both increased. The 90+ day credit card delinquency rate increased from 7.8% to 8.3% which is the highest rate since Q2 2015. This explains why the net percentage of banks reporting tightening lending standards for credit card loans increased from 6.4% to 15.2%.

The 90+ day delinquency rate on auto loans increased from 4.5% to 4.7% which is the highest rate since Q4 2011. This high delinquency rate is in tune with the weak auto sales we mentioned when discussing the retail sales report. As you can see from the chart below, auto loan growth for borrowers with credit scores below 660 is higher than growth of borrowers with FICO scores above 660.

Auto dealers are starting to lower their lending standards to make up for weak sales. That will lead to higher delinquency rates.

Conclusion

The April retail sales report was bad as it missed estimates
across the board. However, it was hurt by the seasonal adjustment which was
made because of the timing of Easter. The consumer deleveraged this cycle. However,
issues are creeping up in auto loans and credit card loans. This data is
supported by weak auto sales and tightening lending standards for credit cards.

The post Are These Red Flags In Retail Sales & Consumer Debt? appeared first on UPFINA.

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