Chart 1: US Retail Sales growth since April 2016 Month on Month seasonally adjusted

Source: Bloomberg

US consumers getting nervous or merely saving more?

Chart 1 is the focus of a somewhat worrying current debate as to why US Retail Sales have fallen in the two consecutive months of February and March while CPI Inflation was also falling. An important technical point is that it is month on month sales that have fallen and the year on year growth was a healthy 5.2%. The numbers are seasonally adjusted but not adjusted for inflation which could mean that the same volume of sales in one month simply cost less in the next one. However, CPI inflation had actually been increasing in the seven months before March this year while the Retail Sales numbers were rather soft in early 2016. Fewer sales in car showrooms and gas stations mainly accounted for the falls in February and March, which did not occur across the board and the ‘control group’ (which excludes cars, gasoline, building materials and food) actually rose quite briskly last month. In other words, these figures can be used to argue in a number of different ways.

Retail Sales, nevertheless, are very important because of their direct impact on Consumption, which in the US and most other advanced economies represents over 60% of GDP. Why then might US folks be starting to spend less? It really could just be temporary but it has to be said that both in recent months and over the last 10 years inflation has largely offset increases in Average Earnings. The US Housing market is highly polarised between areas of relatively high employment typically on the East and West Coasts and the less affluent mid-West and in both places higher prices and rents are putting further pressure on disposable income. Another factor may be demographic with more baby boomers in retirement and feeling less well-off while the next generation may be more concerned about healthcare and other political uncertainties but the Personal Savings Ratio has been quite stable between 5% and 6% over the last year. There are two more ominous explanations, both of which have been previously mentioned several times in Economic Insights. First, US consumers are up to their ears in debt: credit cards, car loans, student loans and mortgages to the extent that even the banks are starting to become more prudent. Second, many people may feel they have enough stuff already and there are limits as to how many cars, TV sets and even smart clothes  they want to buy.  Any sustained period of consumers’ cutting back on borrowing and buying less would directly affect GDP and, unhappily enough, US Q1 GDP is not going well.

Chart 2: US Q1 GDP blues

Source: Blue Chip Economics

Following Friday’s release of March Retail Sales the Atlanta Fed cut its Seasonally Adjusted Annualised Rate (SAAR) for Q1 GDP to a miserable 0.5%, which compares with 2.1% annualised in Q4 and expectations of at least 0.4% quarter on quarter for Q1 in both the UK and the EZ. The Atlanta GDP Nowcast has its critics as well as fans but the blue line on Chart 4 also shows a slide in the forecasts of major financial institutions. There is an argument that US economic data often starts a new year badly but that has not been the case in the Labour Market so far in 2017 and the opposite has happened in business and consumer confidence surveys.

This week brings the March data on the Housing Market and also Industrial Production, which has yet to catch up with bullish business surveys. It will be interesting to see what the IMF makes of it all in its Quarterly Global Update, which is due to be released on Tuesday. In January the IMF forecast US GDP growth of 2.3% for 2017 as a whole and that might well be as good as it gets.

Chart 3: Bond markets are not buying the reflation story

Source: Bloomberg

Eastward promise

The IMF puts itself on a hiding to nothing with its quarterly GDP updates but at least it is on safer ground in expecting Emerging Market and Developing Economies to dramatically outperform the US and other Advanced Economies in 2017. Overnight China rushed out the latest batch of core data ahead of everyone else and all higher than previously.  Q1 GDP was up 6.9% (year on year) with March Industrial Production, Retail Sales and Fixed Asset Management. While the usual doubts must be attached to the accuracy of the detailed numbers it does seem as if there has been a bounce in economic activity. The growth appears to be coming from higher infrastructure spending, steel production, retail estate investment and commodity trading fuelled by mainstream and shadow bank finance. This follows last week’s very strong Export and Import numbers, which were mysteriously rather less Trump-pleasing than in February.  Plummeting Inflation is another Chinese puzzle with food prices being the official explanation. Whether or not this is sustainable it is likely to boost global trade, especially amongst the ASEAN countries and….er….the US .Meanwhile, in its own chaotic way India is still likely to continue to top the bill with growth of 7% plus, although Industrial Production is still proving erratic and reports of the cash dispensers again running out of banknotes will not help.

In contrast, the IMF has been consistently cautious about Europe and inflation fell back here too thanks, as in the US, to lower oil prices. Industrial Production disappointed here too in February and is significantly lagging a run optimistic PMI surveys. This week brings the flash April PMIs for Germany, France and the EZ as a whole and they may not be as promising as of late.

Figure 4: Taking the Golden Road to Samarkand  …..er…Yiwu actually!

Source: Google Stock Image

Meanwhile in the UK there are some intriguing parallels with the US economy: strong Employment numbers but inflation matching increases in Average Earnings, slowing house price rises and some signs of possible faltering in Retail Sales. UK Q1 GDP growth is likely to be only slightly slower than in Q4 but Inflation has at least one more spurt ahead arising from sterling’s second post-referendum nose-dive in last October. Amidst a certain amount of jitters over Brexit  one hopeful symbol of the new ‘global Britain’ was the departure of the first ever direct train from Barking to Yiwu on China’s coast, carrying  exports of whisky, soft drinks, medicines and baby products (but mercifully no opium). Chart 6 below shows the locomotive bearing the Deutsch Bahn logo heading first for Duisburg but it should be remembered that DB own Arriva plc. Eastern promise, indeed!