Unexpected
The August retail sales report was a pleasant surprise after consumer sentiment readings in August seemed to have hit rock-bottom given the new wave of COVID cases. Retail sales increased 0.7% in August (up 15.1% from August last year), while expectations were for a 0.8% decline. If you exclude autos (car sales have been under pressure not from a lack of demand, but just a total lack of supply), retail sales actually increased 1.8% from the prior month.
Moral of the story: Sales were strong across most categories the impact of the delta variant did come through across bars and restaurants, where sales were flat compared to the prior month. This actually also bled a bit into last week’s jobless claims, which increased 20k from the prior week when we had hit a new post-COVID low for weekly jobless claims. I think this report is indicative of the fact that consumers have generated over $2T in incremental savings during the pandemic and they’re ready to spend – if the rise of COVID cases means they can’t spend it one way, they’ll find a way to spend it another way. Hopefully this hunch is valid, because otherwise we could see some softness coming as consumers become weary heading into the flu season with rising pediatric COVID cases and no approved vaccines for kids.
Marginal improvement
Consumer sentiment fell off a cliff in August and gained some traction in early September, but the measure is still sitting near the lowest readings in over a decade. The biggest concern is inflation. A big part of this is actually coming from the housing market getting a bit out of control – consumers don’t have much confidence in their ability to buy homes today (compared to 12-18 months ago) as home prices continue to post double-digit gains compared to the prior year.
Moral of the story: Inflation tends to be a self-fulfilling prophecy of sorts – if people believe prices are going to rise, they’ll want to buy now before prices rise even further, which pulls forward demand, which then actually does increase pricing. The other alternative is that consumers believe the inflation to be transitory and expect prices to stabilize in the upcoming months, which would be indicative of a slowdown in the coming months but a strong rebound after prices stabilize. At least as of now, consumer spending still seems to be fairly robust, but dwindling consumer sentiment is not a great harbinger for what could be coming…
Normalizing?
We’ve seen home price appreciation start to moderate a bit into August and we saw something similar coming out of the August CPI report as well. Prices increased **only** 5.3% from the same time last year (up 0.3% from the prior month), but came in below expectations. Excluding energy and gasoline (up 25% and 42% compared to last year), prices actually increased at the slowest pace since February.
Moral of the story: Inflation might be showing the first signs of normalizing, but prices have reset at a higher level. While we have also been seeing some wage growth to help consumers keep up with elevated prices, it hasn’t been nearly enough. The job market is really aggressive right now for the right skills, so hopefully wage growth keeps up with inflation and keeps consumers from getting too spooked by inflation.