Economists React: ‘Weaker Underlying Picture Revealed’ for Consumer

http://blogs.wsj.com/economics/2010/06/11/economists-react-weaker-underlying-picture-revealed-for-consumer/

Economists React: ‘Weaker Underlying Picture Revealed’ for Consumer



–One step forward, 1.2 steps back? Retail sales unexpectedly declined in May in what appears to be the second concerning consumer data point in the last week. While the number is likely to result in talk of double-dip risk, we see the recent results as an indication that the consumer recovery is over and transitioning into the so-called new normal economic environment. –Guy LeBas, Janney Montgomery Scott

– May was not great, but not nearly as soft as the headlines would suggest. Most of the decline is being driven by the largest monthly drop in building materials (home improvement spending) in recorded history (-9.3%). This follows huge increases in this component over the prior two months. The monthly pattern could be related to the timing around the homebuyer tax-credit expiry. –Jay Feldman, Credit Suisse

–Excluding building materials and the other erratic components -­ autos, gas and food ­- core sales were up a tenth in May, following a 0.2% decline in April. These two months were much weaker than the previous two, when this measure of core activity rose by an average of 1.1% per month. This strong performance likely reflected a combination of tax refund spending, post-winter storm repair spending and a boost from tax rebates for energy efficiency appliances. With these effects all now gone, the weaker underlying picture is revealed. –Ian Shepherdson, High Frequency Economics

–Consumer spending remains on an upward trajectory. The underlying details of core retail sales were mixed, with furniture and electronic sales picking up but apparel and general merchandise sales declining. Overall recent retail sales reports show a cooling in consumer spending growth from Q1 but not outright retrenchment. –Zach Pandl, Nomura Global Economics

– Discretionary retail sales, purchases of items people don’t have to buy, fell 0.05% in May after falling 0.26% in April. Bottom line, consumers only spend when they have to and they don’t spend much — spending is not the recreational activity it was prior to the recession. Unemployment is still at extraordinary high levels, there is no equity to take out of homes, and the stock market has proven of late to be an unsteady source of wealth to fund purchases. This economy is still a long way from consumers picking up the growth baton from manufacturers. And manufacturers are facing renewed headwinds of their own, thanks to the cheapening of European exports into Asia. –Steven Blitz, Majestic Research

–The sources of much of the surprising softness in May retail control were the general merchandise and apparel categories. We suspect that some of this may reflect inadequate adjustment for the unusually late Memorial Day holiday but will have to await next month’s report to determine if this is the case. The softness in May retail sales is disappointing, but consumer spending still appears to have accelerated in recent months due to improved income growth. Also, lower fuel prices should be a plus for the next month or so. –David Greenlaw, Morgan Stanley

–We won’t pretend for one minute that this isn’t a disappointing retail sales report. However, we won’t jump off a cliff either on the economic recovery theme. First, retail sales is a revision prone and volatile series. Second, the big drops were in categories that do not feed into the calculation of consumer spending in GDP. Retail sales say autos fell 1.7% in May but industry data report that light vehicle sales rose 3.8% (a complete disconnect and the latter goes into GDP). Building materials plunged 9.3% (but still up 27.4% at an annual rate over the last three months) but this is an intermediate good and GDP measures final output (thus building materials are recorded in housing construction). Gas station sales fell 3.3% but this is likely a price related move (and GDP adjusts for prices). –RDQ Economics

–The labor market recovery will be a grudging one, that consumers will enjoy only modest gains in wages and salaries for some time, and that consumer spending growth will therefore prove disappointing relative to more optimistic forecasts that became more prevalent in recent months. –Joshua Shapiro, MFR Inc.

–Most of the June economic releases are going to be soft for reasons other than underlying fundamentals. The headline PPI and CPI should be down due to the aforementioned drop in seasonally adjusted gasoline prices. Housing starts and new home sales probably sank noticeably after the tax credit expired on April 30 (existing home sales may have one more blaze of glory, because resales are recorded at contract closing), and lower aircraft bookings may depress durable goods orders. Thus, by the end of the month, the pessimists will probably have worked themselves into an absolute frenzy over a double dip, even if the trend has not really moved much. Such is life in the early stages of recovery. The data are mixed, there is ebb and flow, and the outlook is not obvious. Just one more reason for financial market volatility this summer. –Stephen Stanley, Pierpoint Securities

–U.S. household spending has considerably lost momentum in the middle of the second quarter… A win of Team USA in their first group game against rival England should at least help to boost sales of soccer jerseys, thereby providing another temporary stimulus for some retailers — and food & drinking places as well. –Harm Bandholz, Unicredit