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Consumer Confidence To Remain Range Bound, Despite Friday’s Marginal Improvement

June 28th, 2010 Michael McDonough Comments off

Despite Friday’s better than anticipated confidence number it’s unlikely the
index can show sustained gains until initial jobless claims move well below
current levels.   As the attached chart highlights, in 2009, as claims began to
fall, confidence began to rise off of crisis lows.  However, since the start of
2010 this trend came to an abrupt halt.  Both indices have since traded in a
relatively confined range with claims remaining north of levels indicative of
sustained job growth.  What’s shaping up to be a jobless recovery will weigh on confidence impacting everything from retail to home sales over the months ahead.  Additionally, mundane income growth, which has primarily been bolstered through increasing government transfer payments—set to slow over the months ahead—could put additional pressure on confidence without significant, albeit doubtful, gains in private pay over the near-term.

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Building Material Sales Add Volatility to Retail Sales

June 11th, 2010 Michael McDonough Comments off

Unusual volatility in the sale of building materials has exaggerated retail sales over the past three months.  While this doesn’t change the prevailing trend, sales in both April and March would have appeared far less optimistic than reported.   Building material sales climbed 8.0% in both March and April-a pace not seen since March 2004-plummting -9.3% in May.  In April the surge in building material sales, despite broad-based weakness in most other retail components permitted retail sales index excluding automobiles andgasoline to rise 0.6%. However, as you can see from the attached chart, if you excluded building materials from the index retail sales ex-autos and gas in Aprilwould have fell -0.2%, compared to the reported 0.6% rise.  Using the same parameterssales in May, sales would have risen an anemic 0.1% (still better than the -0.5% decline reported in today’s release).   Reducing the recent volatility caused by building material sales, the trend still points toward a lackluster summer selling season without significant, albeit unlikely, improvements to household balance sheets.

Source: Bloomberg

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28% of all U.S. Income Comes From the Government

June 4th, 2010 Michael McDonough Comments off

Source: BEA

Nearly 28% of all income received in the U.S. comes in one form or another from the U.S. government.  As of April 2010, government wages combined with government transfer payments total 27.8% of total income in the US.  Breaking it down further, government wages plus transfers equals nearly 67% of total private sector wages.  These statistics highlight the impact of expansionary fiscal policy and the country’s increased reliance on the government for economic growth.  Eventually government transfer payments will need to be scaled back to converge with its historical norm to reduce swelling deficits, which could reduce national income by nearly $500 billion on an annual basis. This of course would be a negative for the nascent economy recovery turning fiscal stimulus into fiscal drag, and this could occur sooner rather than later.    

 

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Categories: Consumer News, US Tags: ,

Food Stamp Usage Explodes

June 2nd, 2010 Michael McDonough Comments off

Food stamp usage has climbed to new highs in the U.S. with over 40mn subscribers–roughly 15% of the total population–as of this morning’s release for March.  The rise in volumes coincided with an explosion in costs for the program to $5.4bn/month from $3.6bn/month at the start of 2009.  Surging food stamp use or what is referred to by the USDA as Supplemental Nutrition Assistance Program (SNAP), is another indicator highlighting challenges still facing consumers in the midst of exceptionally high unemployment and relatively stagnant wages, which have increased by just 0.3% over the past year.  Such a large percentage of the population on food stamps also likely has an adverse effect on consumer confidence, which remains well below its pre-recession levels; albeit well off its post Lehman lows.

Source: USDA

The state with the fewest subscribers in 2009 was Wyoming with 26,762 participants, while Texas had the most with 3.0mn.

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Credit Card Delinquencies Fall

May 17th, 2010 Michael McDonough Comments off

Credit card delinquencies declined in April for the fourth straight month, indicating that consumers are gaining traction.  Diminishing delinquency and  default rates could eventually lead lenders to reduce strict lending standards; following significant tightening subsequent to the subprime crisis.  On this  note, more lenient lending standards could have wider implications for the U.S. economy, which consists mostly of consumption.  Since the onset of the recovery, consumption growth has lagged previous recoveries with deleveraging and a lack of credit acting as a strong headwind.  As confidence builds, more  lenient standards could eventually bolster consumption by providing consumers  increased purchasing power.

While the downward trend in delinquencies is a move in the right direction,
significant changes to lending policies will not occur overnight–delinquencies remain well above their historical averages.  To monitor changes to lending standards I recommend you review the Fed’s quarterly Senior Loan Officer Survey, which tracks credit standards, demand for credit, and borrowing costs for personal, business, and real estate related loans.

Credit Card Delinquencies:

Source: Bloomberg

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Retail Sales Just Ain’t What They Used To Be:

May 14th, 2010 Michael McDonough Comments off
On the surface the investors should be celebrating April’s higher than estimated retail sales growth, but a look behind the curtain reveals a slightly different picture.  The retail sales control group, which the government uses to calculate GDP, actually fell -0.2% during the month, its first decline since July 2009 (see chart).  The control group factors out sales for autos, gas, and building materials. 

Source: Bloomberg

Additionally, overall gains were not nearly as broad-based as many had hoped.  Building materials (+6.9% m/m), was the only component to show significant growth, followed by health and personal care sales that rose by a meager +0.9%.  Sales of furniture, electronics, clothing, and general merchandise all fell during the month.  Some good news did come from upward revisions to the first quarter sales data that will provide some tailwinds for the second estimate of first quarter GDP growth originally estimated at 3.2%.  Nevertheless, the weakness behind this report will likely do little to help significantly bolster business confidence; keeping companies hesitant about hiring additional full-time employees.

Source: Bloomberg
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Preparing for Retail

May 14th, 2010 Michael McDonough Comments off

On the surface, a recovery in retail sales is not only a harbinger for stronger economic growth, but could prove to be the missing link for job creation (see chart).  Climbing out of the deepest recession since the Great Depression, consumption growth has been surprisingly tepid, at least partially due to companies’ lack of confidence in the current recovery.  This is best demonstrated by surging temporary employment—first in first out employees—while overall hiring is lagging.  While forecasted gains in April’s retail sales, released 8:30 a.m., (+0.2% m/m, +0.4% ex-autos) could help bolster confidence, concerns linger that these improvements may be artificial, fueled by temporary government stimulus, and not be broad based enough to support a genuine recovery.  Both sides of this argument likely have some merit, but I anticipate marginal gains in consumption will continue over the months ahead as consumer confidence strengthens, and as consumer credit levels revert back to their historical norms, after significant deleveraging.

Source: Bloomberg

Thinking quantitatively about this my mind displays Excel’s infamous ‘circular reference’ warning.  People need jobs to consume, and companies need sales to hire.  If companies don’t hire, then people have no income to consume.  While you may be familiar with the adverse feedback loops that helped bring down the market, this is an advantageous feedback loop, where higher sales or faster hiring will support the other factor.  The bottom line is, it will be important to watch whether or not April’s gains are limited to a small subset of sectors, or are more broad-based.  Strong broad based growth will have a much stronger impact on business sentiment, consumption growth’s sustainability, and the likelihood of job creation.

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IP, CPI, & the NY Fed Survey

January 15th, 2010 Michael McDonough Comments off

December’s Industrial Production rose +0.6%, inline with a Bloomberg consensus forecast of +0.6%. November’s release was revised to +0.8% to +0.6%.  December’s reading was almost entirely due to a 5.9% jump in utilities stemming from extremely cold weather around the country. The index’s manufacturing component actually fell -0.1% during the month, while mining output rose modestly by 0.2%.

December’s Consumer Price Index gained +0.1%, after rising +0.4% in November. On a year over year basis, CPI is up +2.7%. Core CPI rose by +0.1% during the month following no change in November. On a year over year basis Core CPI is up +1.8%.  This data continues to indicate that inflation will not be a concern over the near-term,thereby reducing pressure on the fed to remove accommodative monetary policy.

The Empire State Manufacturing Survey jumped to 15.92 in January, compared to a revised 4.50 in December (originally reported at 2.55). It is important to note that this month’s data includes annual revisions. Looking the components: New orders rose to 20.48 in January from 2.77 in December; Prices paid climbed to 32.00 from 19.74; the 6-month outlook finished at 56.00 from 52.63; and finally the employment index moved into positive territory with a reading of 4.00 in January from -5.26 in December.  This result was well above expectations, and it will be interesting to see of the Philly Fed Survey demonstrates a similar surprise on January 21st.

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December Retail Sales Disappoint

January 14th, 2010 Michael McDonough Comments off

December’s Retail sales unexpectedly fell -0.3%, after a revised +1.8% increment in November (previously +1.3%). The latest Bloomberg consensus forecast was for a rise of +0.5% with forecasts ranging from 0.0% to +1.2%. The decline was broad based and included an unexpected  -0.8% change in motor vehicle sales.  This data includes online sales.

Ex-autos retail sales dropped -0.2% during the month, compared to a revised reading of +1.9% in November (previously +1.2%). The latest Bloomberg consensus forecast was for an increment of +0.3%.

This data indicates that a recovery in retail sales will be choppy over the months ahead, with the labor market remaining as a significant headwind.  This data combined with a modest jump in initial employment claims are leading equity markets lower in pre-market trading. This data should not have any significant impact to 4Q09 GDP expectations, which I believe will come in around 4.0%.

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Consumer Credit Takes A Nose Dive

January 8th, 2010 Michael McDonough Comments off

Consumer Credit outstanding dived by a record -$17.5bn in November, compared to a revised -$4.2bn decrease in October.  The Bloomberg consensus forecast was anticipating a more moderate -$5.0bn decline. Individual estimates ranged from  -$10.0 bn to a high of -$2.0bn.  Revolving credit credit card balances) fell by -$13.7bn in November compared to a decline of -$7.4bn a month prior.  Nonrevolving credit (auto credit, vacation loans, education loans, etc.) dropped -$3.8bn during the month versus a rise of$3.2bn in October.

This data continues to imply that banks are unwilling to lend and consumers remain hesitant about taking on any new debt.  The bottom line here is don’t look towards at credit cards any times soon as a means to bolster consumer spending.

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