The conventional wisdom goes something like this: Spurred by President Trump's promises of lower taxes, "yuge" job gains and health care reform, the economy is poised to go gangbusters thanks largely to boosted consumer confidence.
Steady job gains, moderate inflation pressure and nascent wage growth are all positives as well. No wonder the Conference Board's Consumer Confidence index surged to its best level since July 2001 last month.
Yet the "hard" economic data hasn't followed. The Atlanta Fed's GDPNow real-time estimate of first-quarter growth has fallen to a pitiful 0.9 percent following a lukewarm retail sales report last week. And now, there is mounting anecdotal evidence that something is wrong with the American consumer.
The latest monthly Bank of America debt and credit card spending report paints a grim picture, showing an outright collapse in department store sales to levels below what was seen during the financial crisis. The drop is blamed on a delay in tax refunds, since the spending declines are concentrated in lower income households.
While tax refunds are likely playing a role, the spending downturn seems to be part of a bigger problem. Last year featured a number of familiar retailers filing for bankruptcy protection, including Aéropostale, Pacific Sun and American Apparel, while retailers like Gap (GPS) and Target (TGT) continue to struggle.
Moody's retail analyst Charlie O'Shea warns the environment is likely to get worse before it gets better as the number of distressed retailers — measured in terms of credit quality — has more than tripled since the recession of 2008-2009. Recent channel checks by Cowen's retail team showed that customer traffic in the third week of march dropped 13.3 percent from last year. The shift to online shopping might account for some of the challenges traditional retailers are facing, but Amazon’s (AMZN) holiday season sales, announced early last month, missed expectations and its outlook for the current quarter wasn’t as rosy as Wall Street had hoped. Auto sales are being hammered too, with used vehicle prices falling the most since 2008, according to the National Automobile Dealers Association.
It's all a bit of a head scratcher.
Deutsche Bank economists note that, in terms of spending capacity, the average American consumer is in the "best financial shape in decades" thanks to the lowest debt-to-disposable income ratio in 15 years, higher wealth levels (thanks to higher prices of housing and stock prices) and low debt-service burdens thanks to low interest rates.
Yet David Kelly, chief global strategist for J.P. Morgan Funds, noted Monday that, consumer spending appears to be climbing at a 1.4 percent annualized in the current quarter — the lowest pace in nearly four years. Ed Yardeni of Yardeni Research told clients: “Any way we slice and dice the data, we find a significant slowing in the growth of real consumer spending on goods since mid-2016.”
I can offer two possible explanations — aside from the delayed tax return theme — for the disconnect between consumer hype and the reality of less-than-awesome retail sales activity.
For one, while surveys show Americans are pretty pumped about what the future will hold, today's reality is much different: A recent increase in inflation pressure to a five-year high has pushed real wage growth into negative territory on a year-over-year basis. The fact is, wage growth isn't keeping pace with the rising cost of things like airline fares, shelter and clothing. So while "wealth" measures have improved, consumers could be demonstrating some caution based on how they are viewing their month-to-month income.
Second, according to research from Bank of America Merrill Lynch, the surge in post-election confidence has been driven by middle-income and older Americans in specific regions of the country. The trouble is that those cohorts and regions are not the main drivers of consumer spending in the aggregate.
Put differently: The areas and groups of people most excited about the future of America under Trump aren't the primary drivers of retail spending in the economy. Which is sort of ironic.
The truth will be revealed as we head into the summer shopping season and those tax refund checks start arriving.
Anthony Mirhaydari is founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. Two-week and four-week free trial offers have been extended to readers of The Fiscal Times. Redeem by clicking the links above.