No Comeback for Consumers (Because They Never Left)

Note: Due to his travel schedule, Bob Johnson is giving his weekly economic update in this and an earlier video report. His written column will return on Feb. 20.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. We had a strong retail sales report in January. Is this a sign that consumers are coming back, or have they been here the entire time? I'm here with Bob Johnson, our director of economic analysis, for his take.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: This was a strong report for January. December's numbers were revised upward. Is this a sign that we're seeing an inflection point and consumers are starting to accelerate, or do you think this is just statistical noise?

Johnson: As you've implied, the consumer has been there all along, and the retail sales report has become incredibly difficult to analyze. But the good news is that the headline numbers looked very good to people. Instead of December being down 0.1%, it was up 0.2%. Just the sheer fact that it wasn't that disaster that everybody thought it was is a huge help to the psychology of where we are. Then to have an equally good number in January, that consumers didn't back off anymore despite what's happened in the market over the month of January... it sent a pretty powerful message to people that maybe things aren't so bad after all.

Glaser: What did this look like on a year-over-year basis?

Johnson: That is always the best way to look at it. It's about 3.5% or so, on a year-over-year moving average basis, on retail sales growth, which is about what it's been for most of the recovery. That's probably the average since 2010. We did have a brief period between mid-2014 and early 2015 when we did over 4% growth in the retail sales category. What happened there, that big boost in hiring right at the end of 2014, and also into the beginning of 2015, has skewed a lot of numbers. With all those new hires, a lot of people went out and purchased things when they were back on the job, and that's skewed a few statistics. And now we've dipped back to where we should be, and at this 3.5% level; it looks pretty good.

And by the way, at 3.5%, you probably have to add about 0.5% to that for goods deflation, so it's really more like 4%, and it has been there for the last few quarters. Most numbers aren't terribly different than that for the overall goods inflation rate.

I keep pointing out that the retail sales report is not inflation-adjusted, and next week we'll get the CPI, and just like we did last month, we'll go through and analyze what that means to the numbers.

Glaser: It looks like the consumer has been pretty steady, but you're not seeing any acceleration, though?

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Johnson: No. People are starting to say, "Sales fell off and now consumers suddenly feel better." No. They've been there the whole time. Incomes have had some nice improvement, and generally, when the incomes and the spending don't agree, usually one of them eventually gets revised.

Glaser: I know that the data can be choppy month to month, but let's look at some categories and see where consumers were spending. What's performing well right now?

Johnson: This was the month where everything that did badly in December did well in January, and everything that did well in December, did badly in January. Everything reversed its way out. Just go down the list--department stores, general merchandisers all did poorly in December, a lot of it because of the lack of cold weather. And now as things return to normal, just as we predicted, those categories came bounding back in January.

Amazon and the electronic retailers in general, in their categories, showed a nice January number for growth, and December was not as good. Again, January was a colder. Let's order online instead of going to the store.

You've seen a lot of those bounce-backs that came from bad weather. It impacted so many things: the GDP calculation, the consumption calculations. We really did have a lot of movement there.

Glaser: How about restaurant spending? I know that's a key consumer confidence indicator.

Johnson: It is, and this is a good time to go back and mention--restaurants may be a little less guilty of this than some--but these monthly numbers, the first round that we get in the first three weeks after the end of the month, get revised like crazy. And the second batch pretty much reflects reality. That's when you've got over two-thirds of the respondents back on the surveys they send out to the actual stores. In the first period, they have to do a lot of estimating. They might have some pretty good ideas about what the general retail sales number might be, but they might just estimate the categories by asking, "What's been the historical norm for those?" And that complicates the analysis, and there are often huge swings.

The reason I'm going there is because restaurant sales grew 0.8% in December as originally reported. They revised it up to 1.3%, a massive number. That would imply well over 12% growth. That's probably not reality. We haven't got that many more restaurants and that many more tables to sit at. And lo and behold, the number on restaurant sales for January was down 0.5%. I don't think the 1.3% is right, and I don't think the -0.5% is right. But, we will watch it. That may be one category that showed some signs of pressure from having a worse stock market. Clearly, we're not happy that the number was there, but given the revisions in the past month's number, it's hard to say. 

And one of the other interesting things that happened, and we've been writing about this, and this was in GDP, in consumption, and some other reports, was that sales at grocery stores were actually down in December. I think they might have improved those just a little bit in the revision. But now we had a half a percent gain in grocery sales in January. That sometimes does happen, where we have a bad month in groceries and that shows up as a good number in restaurants, because people eat out more. And then as people stop eating out and they eat more at home, the numbers go in reverse.

Again, I wouldn't read a lot into this until we get more final numbers, and I like to look year over year, where grocery stores sales are still relatively slow and restaurant sales are very strong.

This just shows the difficulty in trying to read too much into these monthly numbers. To think that everybody's basing their decisions on these numbers that are so changed in the final analysis, it's pretty remarkable.

Glaser: We had a pretty poor fourth-quarter GDP reading. Does a report like this make you think that that really was just an anomaly, and that we're going to see an acceleration of growth in 2016?

Johnson: Well, for the full year, no. The demographics that we talk endlessly about, and the population growth issues, will both keep a lid on GDP growth in a 2%-2.5% range, and maybe it force us down into the lower end of that range. But, the 0.7% that we saw in December may even end up to be a little less than that on the next revision, maybe half a percent because it's construction numbers. But I'm thinking that maybe it will grow 2% or more in the March quarter. Inventories might be holding us back, because a lot of categories started to shrink their inventories a little bit, and of course, that impacts the GDP number.

One number that does worry me--and it tangentially came in through the auto sales number, which looked good in the retail sales report this week--was auto inventories. They have started to move up in a painful way, and you know how importantly we think about autos. Autos... and I'm talking now the real cars part of it, nobody wants them. The incentives there are huge. We used to talk about, well, the mix favors SUVs and crossovers. They make huge profits, and that's great for the auto companies. But now they've got all these plants that make autos and nobody wants autos, and they're having to put dollar bills inside each car to start moving automobiles versus SUVs and crossovers. So, we've seen a pretty dramatic build in auto inventories. Meanwhile there's a shortage, and nobody can get their hands on certain classes of trucks and vans.

Glaser: Looking to the next week, then, what data are we going to see that will confirm this thesis?

Johnson: One number we'll get next week that's probably the most important, and that will help soothe people a little bit, is industrial production. It will be up maybe as much as 0.4% when it's reported. That's the all-in industrial production, including utilities and mining. We've seen utilities bounce back. We had a colder January, so that will help the utilities numbers.

On the manufacturing side, based on what we saw in hours worked, what we saw in a number of people in manufacturing, all suggest that the manufacturing economy picked up in January, and that may grow as much as 0.7% in a single month. So, people are expecting big things. I don't know if we'll get all the way there. I've seen a little leakage from the employment numbers into the output numbers once in a while.

But nevertheless, this would certainly soothe people's minds who think that manufacturing is on a one-way street down. We've talked about a lot of things: chemicals, foods. There's a lot more to manufacturing in this country than equipment to make oil shale, which has actually declined a whole bunch, but it isn't a very big percentage of the total. That will probably be the key report next week.

We mentioned CPI. It's expected to be down 0.1% overall next month. Although it's interesting--on a year-over-year basis, we will be moving up a little bit in terms of the CPI. We will probably be somewhere in the 0.9% range on the year-over-year basis. That's continuing to creep up. It may pause because of the recent further decline in energy prices, but the year-over-year number, which was negative at some points last year, has now worked its way back to almost a percent.

Glaser: How about housing? 

Johnson: January is never a very good month to look at housing data, because December was probably a little warm, which creates some questions about, what happens to January when it was cold? It looks like people are expecting the housing starts to actually get better in January, and that might be a tough act to pull off other than maybe the seasonal adjustment factors help them enough so it isn't so bad.

But the starts number is not going to be a particularly important number. January is not the month where you really gauge it. It's March, April, maybe through June: Those are the times that really count in looking at those numbers. The other ones can just be weather fluctuations. Not a very high percentage of the annual sales occur in those months. So they're really not indicative, and they're overly influenced by seasonal factors.

So I wouldn't panic either way on those numbers. The expectation is that they'll also show that we're hanging in there, if you will.

Glaser: Bob, thanks for your analysis today.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.