Market Insights

This podcast reviews how strong consumer data may reduce dangers of a looming U.S. recession. It also breaks down how the industry is undergoing historic change as demographics change and e-commerce spreads.

TRANSCRIPT:

June’s retail sales report was better than expected today. It was the second straight beat, which could dispel talks of a recession. Several other numbers have also been impressive lately.

Personal income grew much more than economists forecast the last two months. Wages are also rising faster for people at the lower end of the income scale, and Americans have been reentering the workforce.

All that’s good for the economy.

So why have people been so negative? One reason is that American consumption is going through major changes at the very same time that things are getting better.

The big story is obviously the Amazon effect. Thousands and thousands of stores are closing at countless shopping centers across the country.

But it’s important to realize that this inevitably had to happen. Remember all those chains like Linens ‘n Things, Barnes & Noble, Circuit City, Toys “R” Us, Gap, Old Navy, etc? They mushroomed in the 1990s and early 2000s, with retailers simply overbuilding locations. That glut of square footage made the industry even more vulnerable to retrenching as e-commerce spread.

And when you think about it, it’s actually pretty amazing that we continue to see retail sales going up at the same time a record number of retail stores are getting closed.

That brings us to another key point: Americans are opening their wallets for very different kinds of establishments. Did you know that non-store retailers grew 13.4 percent between June of 2018 and June of 2019? Meanwhile traditional clothing stores shrank by almost 1 percent and appliance stores cratered 5 percent.

But two categories in traditional shopping center are still strong: restaurants and personal-care stores. This fits a theme most of us have probably heard: People are spending more money on experiences and less money on things. It’s a painful change for an industry that for years focused on merchandise.

And it’s caused a lot of consumer stocks — like department stores — to nosedive at the same time that consumption is coming back.

Another conundrum is that two important monthly polls seem to be abnormally bearish: consumer sentiment and consumer confidence.

Both have recently showed a lot of anxiety about President Trump’s trade war with China, but that’s coincided with heavy media attention on the story. And, the fears have mostly hit rich Americans. That makes you wonder how relevant it really is, especially when other points, like employment and spending plans, have remained solid.

This year’s gains in the consumer come at a time when household debt is only going up 2 to 3 percent annually. Compared to rates of 5 to 9 percent last decade. So you have growth that isn’t reliant on borrowing — how’s that bad?

Finally, today’s retail sales report is one of the last important numbers for the second quarter ended on June 30th. Economists are responding by hiking their GDP estimates for the period by about half a percentage point.

It follows strong jobs growth last month. And it comes at a time of low inflation and a Federal Reserve pretty much committed to cutting interest rates on July 31st.

In conclusion, consumption remains the most important part of the U.S. economy, accounting for more than two-thirds of output. The sector is strong and seems to be getting stronger as it evolves away from traditional brick-and-mortar practices — despite a lot of naysayers continuing to warn about the sky getting ready to fall.

Just something to think about as the Dow Jones Industrial Average, S&P 500 and Nasdaq-100 break out to new highs.