Confidence Is High but Economic Gains Are Elusive

04/14/17 04:19 PM EDT
By Eric Morath 

Households, businesses and investors started the year riding a wave of rising expectations for growth with a new, business-friendly president in the White House, but the euphoria hasn't translated quickly into broad economic gains.

Bank loan growth has slowed, economists have marked down projections for output growth, the stock market has lost some momentum and consumer spending is taking an anemic turn.

In the latest evidence, the Commerce Department reported Friday that sales at U.S. retail stores, restaurants and online sellers decreased 0.2% in March from the prior month. February sales were revised down to a 0.3% decrease from an initial estimate of a 0.1% gain. It marked the first consecutive declines for retail spending since the first two months of 2015.

"The market in the U.S. in particular continues to be challenged," Jerry Storch, chief executive of Saks Fifth Avenue and Lord & Taylor parent Hudson's Bay Co., told investors earlier this month. "We're planning as if the environment is not going to improve." The retailer is looking to reduce costs in case sales don't improve.

Uneven retail spending stands in sharp contrast to soaring measures of consumer confidence. The University of Michigan's consumer-sentiment measure, released Thursday, is near the highest level in more than a decade, and the index's measure of current conditions touched the highest mark since 2000 in early April.

"The rising levels of confidence we've seen since the election hasn't translated," said Carl Tannenbaum, chief economist at Northern Trust. "Consumers are saying one thing in response to a survey, but doing something different with their wallet."

He said underlying fundamentals -- chiefly job and wage growth -- should support better spending later in the year, but he is not expecting a near-term spending breakout based on confidence figures.

Inflation unexpectedly weakened in March. The Labor Department's consumer-price index declined a seasonally adjusted 0.3% in March from the prior month, and prices excluding food and energy fell 0.1%, the agency said Friday. It was the first decline for those so-called core prices since January 2010 and the steepest drop for overall prices since January 2015. Slowing inflation pressures could be a sign that it is difficult for firms to pass along further price increases to consumers.

President Donald Trump, stung in recent weeks when an attempt to overhaul the Affordable Care Act stalled in Congress, has cited confidence surveys as evidence of economic momentum. "Economic confidence is soaring as we unleash the power of private sector job creation," he tweeted on Wednesday.

Hiring growth has largely backed up that view, though the broadest measure of economic growth due out later this month is likely to paint a different picture of the first months of 2017.

Many economists project the annualized pace of growth in the first quarter slowed from the 2.1% rate recorded in the final three months of 2016. Following Friday's data release, the Federal Reserve Bank of Atlanta lowered its projection for first-quarter economic growth to a 0.5% pace. In early February, it expected better than 3% growth. Forecasting firm Macroeconomic Advisers forecasts a 0.6% advance for last quarter.

Macroeconomic Advisers expects a rebound to a 3.6% growth pace for the second quarter. Still, the slow start to the year could make it difficult for the economy to grow much better than the roughly 2% pace recorded since mid-2009.

Decreased spending at auto dealerships and gasoline stations were the primary drivers of the recent decline in overall outlays at retailers. Spending on vehicles and parts has fallen for three straight months, according to the Commerce Department, the longest streak of declines since 2008. The slowdown in car sales is a worry because they have been a driver of economic growth. U.S. car and light-truck sales hit a record high in 2016.

Dealership lots are swollen amid flattening demand following a record seven-year run of rising vehicle sales. Even with record-high discounts, U.S. dealerships in March carried 72 days' worth of inventory based on the current sales pace, up from 66 days a year earlier.

Tepid sedan sales are the primary reason for the inventory glut, as consumers gravitate toward SUVs and pickup trucks given low fuel prices. General Motors Co. is in the process of laying off about 4,400 workers as it curbs production across several Midwest plants, mostly at factories that make sedans.

Bank loan growth, meanwhile, is slowing markedly. Commercial and industrial loans from banks were up just 2.8% in late March from a year earlier, compared with average growth of 10% in a stretch between 2014 and 2016. Consumer loan growth was up 5.8%, a slowdown from earlier months though in line with average growth in the 2014-2016 periods.

Banks reporting earnings this week said one reason for the loan slowdown was that businesses were turning to booming bond markets for capital rather than tapping credit lines.

It is possible the first-quarter slowdown will quickly reverse itself. In several years of this expansion the economy started out on a slow footing only to pick up as the year progressed. In 2011 and 2014, for example, output contracted, sparking fears of recession. Bad weather and quirks in statistical seasonal adjustments were among the explanations. Worries about external events, including economic uncertainty in Europe and China, also have nagged at business and investor confidence.

What is striking this year is that confidence started out the year on such a high note, with little obvious follow-through in spending.

Customers at Gazelle Sports, an athletic-apparel chain based in Kalamazoo, Mich., are snapping up more expensive running shoes and limited-edition items than they were a few years ago, said co-owner Chris Lampen-Crowell. But fewer shoppers are visiting his five stores. What is gone is the impulse purchase of a T-shirt by window shoppers.

"People that walk in the door are confident," he said. "But people don't shop as social activity anymore -- it's part of the move to online -- younger people want to spend on entertainment."

The latest retail figures underscore consumers' shift to e-commerce platforms. Department-store sales rose 0.2% on the month, but were down 4.5% from a year earlier. Nonstore retailers, a category that includes online shopping at outlets such as Amazon, posted a 0.6% gain from the prior month and an 11.9% increase from a year earlier.

At least a dozen major retail chains filed for chapter 11 bankruptcy protection this year. That includes clothing seller Limited Stores LLC, which announced it would close all 250 of its stores, and Payless ShoeSource Inc., which is closing 400 stores in an effort to reorganize around smaller operations.

Among younger consumers, "the propensity to buy online shoots up and the willingness to go to brick-and-mortar stores starts declining," Wayfair Inc. Chief Executive Niraj Shah told investors last month. The online seller of home furnishings expects continued sales growth as more millennials get married and buy homes. The firm recently launched a wedding registry.

"You're talking about folks who grew up with digital technology, who've effectively been buying that way their whole adult life," he said.

--Suzanne Kapner and Mike Colias contributed to this article.

Write to Eric Morath at eric.morath@wsj.com

 

(END) Dow Jones Newswires

April 14, 2017 16:19 ET (20:19 GMT)

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