Fri, 17 Feb 2017
Higher inflation plus steady wage growth equals less consumer spending power, says Morningstar's Bob Johnson.
Jeremy Glaser: From Morningstar, I'm Jeremy Glaser. I'm here today with Bob Johnson. He's our director of economic analysis. He thinks inflation data this week is a sign that the consumer could be under some pressure.
Bob, thanks for joining me.
Bob Johnson: Great to be here today.
Glaser: Let's start with that inflation data of the consumer price index. It came in higher than expected, both on a core basis and on a headline basis.
Johnson: Yes, absolutely. First of all, let's go over the month-to-month numbers which aren't my favorite, but just so we can see where they were relative to expectations. The month-to-month inflation rate was 0.6%. That's the highest number going back a couple of years. It was fully doubled the expectation for 0.3% growth. And even on the core, taking out food and energy that is, the expectation was for 0.2% growth and instead, we got 0.3% growth month-to-month which annualizes to something like 3.5, 3.6%. Clearly, we've moved into territory of higher inflation.
Again, month-to-month numbers are volatile, so I don't want to get too wrapped up in those particular numbers, but what's meaningful to me is the year over year inflation number. The headline single month, January to January, showed inflation of 2.5%, a pretty hefty number. Now, a year ago at that same time, that number was only 1.4%. Clearly, we've moved up in terms of inflation rates and from what we know about what's happening in February this year and what happened in February of 2016, I'd say we're in for another bad month of inflation again in February because of the higher energy prices.
Glaser: Consumers are paying more for goods. Are they getting paid more to make up for that?
Johnson: That's a thing that's really got me worried is not so much that inflation is higher. I don't think we're heading back necessarily to a really higher rate of inflation, but here's what's happened. Wage growth despite--we get month-to-month volatility in the numbers--but if you look at the average hourly wage rate, it was growing 2.5% last January, and it's growing 2.5% again this January. Well, sure we've had some ups and downs and some good numbers and especially in November and December, we had some great numbers, not so much in January, but the year over year wage growth is pretty stable at 2.5%. Well, think about that: 2.5% wage growth in both years, but a year ago, the inflation rate was only 1.4%. This year, it's 2.5% on the same wage growth. That's a killer, and that's why I'm worried about the consumer.
Glaser: Speaking of the consumer, we got retail sales data this week as well. Any signs there that they are feeling that squeeze?
Johnson: No, not exactly. I think that was the one number this week that came in stronger than people expected and that's on a month-to-month basis. Certainly, that came in at .04%, if you throw out autos and it was 0.8%. Both numbers higher than expectations, and we've had several months in a row now, where retail sales have been up. They haven't showed their usual up and down pattern, but I'd be a little cautious on that. Yes, the single-month number looked really quite good.
I will admit that, but when you go back and inflation adjusts the numbers and look at a year-over-year number for all of 2016, we were in a very narrow band of 3.5 to 4%. We are at that 4% level right now, but we've been there a couple of other times in 2016. If you go back to 2015 when inflation was very low, the inflation-adjusted retail sale growth got to almost 5%. We're certainly lower than the peak and certainly, we've already seen a little bit of the effect of this higher inflation crimping down consumer demand a little bit. Again, I'd be a little cautious with the number, the retail sales number this time around.
A lot of categories that were strong, drugstores is one. Well, of course they did well. I think they grew 0.8% month-to-month. Well, drug prices went up 0.5%, so that was a big driver. The number doesn't look maybe as big as it appears, and also, oddly, the Amazons and the nonstore retailers had a relatively poor month and maybe the weather was so nice in the Midwest that people felt less compelled to shop online and more to buy in the store themselves, but certainly that was a surprise.
Glaser: If the consumers may have less firepower to power the economy, are we looking at manufacturing or some other part of the economy that will be able to move GDP higher?
Johnson: I think a lot of people are very, very hopeful about manufacturing. I think a lot of eyes are on the Trump plans and hoping that will help manufacturing and bring back more manufacturing jobs and help the consumer. I'm a little bit skeptical on that. I think anything we can do is probably helpful, but on the other hand, manufacturing has got a lot of headwinds in front of it.
One of the key things, we keep talking about demographics--I hate to keep pounding on it--but as we get older and older as an economy, we tend to spend more money on services like healthcare, like vacations. We tend to divest ourselves of big homes and furniture and things, instead of being accumulators. Certainly as baby boomers, that big group moves into that, we certainly have some headwinds for buying of goods, and goods are what we're talking about in manufacturing. The underlying demand for goods is not so great, which doesn't put us in a great spot relative to manufacturing and certainly we've talked about autos peaking out here, with cars lasting longer, Uber beginning to have an impact on people or opting to use that regularly instead of buying a car in some major markets.
We've certainly seen the flattening out of auto sales, and autos is an absolute key component of manufacturing, and it's really going nowhere. Aerospace has been another. Now, maybe we'd get some help with some more defense spending and more building of airplanes, defense aircraft, but Boeing has gone through their big ramp up and I don't think that's going to be as helpful as it was in 2012 and 2013.
Glaser: Index of production numbers this week were pretty weak and I'm just growing that idea.
Johnson: Absolutely. The numbers that came in at relative negative 0.3% on the headline, now that's a little deceptive because some of that is due to the numbers from the utilities, but nevertheless, the year-over-year average number, which is the way I like to look at things, is moved from basically negative 0.1 or 0.2 a year ago to plus 0.2 or 0.3 this year. Clearly not a huge acceleration there despite months of great numbers out of the purchasing manager surveys, which clearly have turned into more of a sentiments survey and more of a hope that something is coming from the Trump administration, and maybe even a little buying here and there because of that. But it's certainly not showing up in the production numbers.
I said, moving from negative 0.1 to something like a 0.3, and even that improvement is not uniform. There are a lot of categories, the big 10 categories that are still down year over year and the leading two categories happen to be automobiles or vehicles, which is clearly slowing, and computers which have had a great year. Outside that, nothing is really doing great. It might sound great to say manufacturing is better and the dollars is doing something or whatever, but you start tearing apart some of the micro data, the individual industries, and boy, there isn't much doing that well.
Glaser: Bob, thanks for your analysis today.
Johnson: Thank you.
Glaser: From Morningstar, I'm Jeremy Glaser. Thanks for watching.