Following the release of May US retail sales numbers, analysis from Daniel Casali, Chief Investment Strategist at Tilney Smith & Williamson
What happened?US retail sales fell -1.3% in the month of May, weaker than consensus expectations of a -0.7% decline, and rose +24.4% from a low base a year ago.
What does it mean?Though retail sales data includes food services, it primarily reflects consumption of goods and captures around 30% of consumer demand, with the remainder being expenditure on services. Given an opening up from lockdowns, money can be expected to be spent on services (e.g. on leisure and hospitality), potentially at the expense of goods. Nevertheless, the outlook for overall consumer demand (services and goods) remains healthy for three reasons.
First, consumption is supported by a recovering labour market. Non-farm payrolls have risen by 15 million from a trough in April 2020 and have recovered 68% of the jobs lost/furloughed since the pandemic began. Despite ongoing uncertainty from Covid-19, there are currently 9.2 million openings (32% higher than their pre-pandemic level), suggesting plenty of hiring opportunities are being generated by the economy. This combination of employment, as well as rising wage gains and longer hours worked, lifts labour income and spending.
Second, households (in aggregate) have benefited financially from the pandemic. The latest data in April show that annualised net fiscal transfers were still running $1.5trn higher than the pre-pandemic February 2020 level and comes on top of a $0.6trn increase in personal income (excluding net government transfers) since then. This stimulus has helped to lift personal saving to an elevated rate of 14.9% of disposable income, giving consumers the financial wherewithal to spend in the future.
Third, rising wealth provides another layer of support for the consumer. US household assets have been boosted by rising stock and property prices, while liabilities have declined as a share of disposable income. To put this into perspective, US household net worth fell $6.5trn in the first quarter of 2020 (when equities sold-off sharply at the start of the pandemic), but they have since recovered $25.5trn up to the first quarter of 2021. Rising asset prices have raised US household net worth to nearly seven times annual take-home disposable income, close to a record high. Though wealth is not evenly distributed, it can still be used to finance overall consumption. Rising wealth also provides consumers the confidence to spend.
Putting together financial resources available to consumers from wealth gains, take-home pay (wages after tax is deducted) and consumer credit, we have calculated a measure of real consumer purchasing power. From our estimates, US real consumer purchasing power rose at a record annual rate of 12.0% in the first quarter of 2021 from data that goes back to 1960, higher than the personal consumption growth of 7.6% expected by the consensus of economists surveyed by Bloomberg for 2021. This metric suggests that consumers have the finances to raise their current rate of expenditure growth.
The key risk for markets is that higher prices lead to demand destruction, where consumers postpone spending until goods and services become more affordable. Should that happen, economists and analysts would need to make downward revisions to output growth and company earnings, respectively, and this could end up being a drag on stocks in the near term. However, on balance, we believe there is sufficient financial support for consumption to sustain faster economic growth and to drive up risk appetite in general for financial securities, such as equities.