“The economy hasn’t lost its mojo.” MarketWatch

 Financial FAQs

“Advance estimates of U.S. retail and food services sales for June 2026, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $768.6 billion, up 0.2 percent (±0.4 percent)* from the previous month, and up 6.7 percent (±0.5 percent) from June 2025.” Census.gov

FREDretailsales

Headlines, such as that consumers “haven’t lost their mojo” have popped up when retail sales rose 0.2 percent in June. It’s a sign of consumers are willing to ‘shop until they drop’, which may keep the U.S. economy growing for some time.

It also means that same level of irrational exuberance of the 1990s is back once again, with the major market indexes at record levels, and consumers seemingly oblivious to the conditions that prevailed during the late 1990s.

 Nobel Laureate Robert Shiller first presented the term irrational exuberance to Alan Greenspan’s Federal Reserve Governors in 1996 to evidence how overvalued stock market levels had become at the time. But it wasn’t until 2000 that the dot-com asset bubble burst that many market commentators and some economists are comparing to the current record market rally.

The MarketWatch headline portrays most of the media’s reaction to the latest Advance Retail and Food sales report by the U.S. Census Bureau. The slightly hysterical headline is really a sign of relief because of the slight drop in monthly gas prices that prevailed during the 60-day cease fire agreement.

But the cease fire has ended. And it reveals how badly the Trump tariffs and Iran war have hurt consumer spending, still the backbone of U.S. economic growth. We have been a consumer-driven economy since the 1950s and end of World War II.

And since retail sales are not inflation adjusted, when adjusted for inflation, gas and food in particular have become less affordable. Retail inflation is still above 3 percent. Retail sales have fluctuated wildly, as per the above graph, rising 6.7 percent in 12 months because consumer bought more in earlier months to get ahead of the rising inflation—i.e., before the Iran War began to jack up everyday prices.

Though sales at car dealers and online merchants both jumped about 2 percent in June, sales fell at grocery, clothing and healthcare stores, says MarketWatch.

So, consumers are still shopping because they must, putting them further in debt. The Consumer Price Index for basic necessities like gas and food is still above 3 percent, as I said, and the wholesale (PPI) price index for raw materials that go into retail goods is 5.5 percent annually, the U.S. Bureau of Labor Statistics reported. It’s still the largest rise in more than three years.

We don’t have to look at just the dot-com bubble to compare, either. I see an unsettling resemblance to the ‘roaring twenties’ of an earlier era from the recovery of another pandemic, the Spanish Flu pandemic of 1919 to 1920 that killed what would be millions of Americans if at our current population level.

It was a long recovery—until 1929 and the Black Friday stock market crash that led to the Great Depression, caused in part by another era of high tariffs that led to product shortages.

How long may this era of irrational exuberance last that has driven the financial markets to record levels with so much wealth pouring into a new space age that will take us years to return to the moon, much less turn a profit?

We are at another turning point in what currently looks like an A.I. revolution, much like the Internet’s introduction that took decades to adopt, and recovered from a Great Recession, let’s not forget.

So the best way to survive another bout of irrational exuberance is to be patient, in my opinion, rather than listen to the crowd that promises the next big thing.

Harlan Green © 2026

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Retail Sales Recovering?

 Popular Economics Weekly

“Advance estimates of U.S. retail and food services sales for May 2026, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $763.7 billion, up 0.9 percent (±0.4 percent) from the previous month, and up 6.9 percent (±0.5 percent) from May 2025.” Census Bureau

 

FREDretailsales

Retail sales are recovering in 2026 because consumers are still shopping, even though paying more for automobiles and gas because of the higher inflation. But it’s emptying their pocketbooks, to no one’s surprise.

So why do they keep shopping? There’s more than a little irrational exuberance prevailing at the moment in financial markets because of optimism over the SpaceX IPO that is breaking sales records. It’s called herd behavior in economic parlance, because its investors seem to believe SpaceX is the next big thing without too much forethought.

Nobel Laureate Robert Shiller calls it lazy thinking, listening to little more than word of mouth or hearsay, or scanning the headlines but not what is between the lines, instead of researching it.

SpaceX is making a tiny profit, yet Elon Musk’s hyper sales pitch has investors believe the sky’s the limit with future earnings from…what, a trip to the moon or Mars? Its IPO has capitalized it as high as established corporations such as Microsoft that have a track record of real profits.

The stock market indexes are still breaking records in part because the major corporations have record profits. And the job market is finally recovering, after almost no job growth last year. The sudden hiring surge is because manufacturing has rebounded; both from the Biden administration’s $5 trillion raised in legislation to modernize U.S. infrastructure and the $1.5-2 trillion suddenly pouring into the A.I. construction of data centers.

In fact, there’s so much irrational exuberance that this so-called A.I. revolution is now being compared to the Dotcom (in 2000) and housing bubbles (2008).

Too much fiber optic cable was laid in the years leading up to 2000 that is only now turning a profit, and too many homes were built during the bubble that weren’t being absorbed by the housing market, resulting in basically flat home sales and too little construction of new homes for a decade.

This is even though the U.S. population has increased by 60 million since 2000, according to the Census Bureau. The result is the lack of affordable housing and record homelessness, a cure of which would be more profitably invested in, rather than A.I.

But despite the market optimism, most consumers have become more cautious. Irrational exuberance hasn’t convinced ordinary consumers who can barely afford to keep up with rising prices. The Conference Board’s Index of Leading Economic Indicators that attempts to predict business cycles, shows too many headwinds for much improvement.

“Consumers are feeling squeezed because everyday costs—especially gas and energy—are rising faster than their incomes, leaving many households with less money available for things like travel, restaurants, entertainment, and shopping. The good news is that businesses are spending heavily on AI, data centers, and new technology, helping to keep the economy growing, while consumers pull back spending,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators for the Conference Board.

Growing retail sales are a positive sign that the economy is improving for consumers as well as market investors but it can’t last unless inflation declines. Will artificial intelligence be the ticket to greater prosperity for all?

Let’s hope so, otherwise the A.I. bubble will also burst.

Harlan Green © 2026

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Retail Sales Slump

Financial FAQs

“Retail trade sales were virtually unchanged (±0.5 percent)* from November 2025, and up 2.1 percent (±0.5 percent) from last year. Nonstore retailers were up 5.3 percent (±1.4 percent) from last year, while food service and drinking places were up 4.7 percent (±1.8 percent) from December 2024.” Census Bureau

FREDretailsales

This FRED graph shows best what tariffs have done to consumer spending, which powers 70 percent of economic activity, let us not forget. Retail sales fizzled in December as I feared would happen in my November retail report, rising just 2.1 percent annually. And retail sales don’t take inflation into account, so consumers weren’t keeping up with the rising prices.

Sales had declined or were barely positive in six of 11 months through November 2025, I said then. So why wouldn’t consumers turn even more cautious with almost no new payroll jobs. The latest Labor Department JOLTS report showed that as many people were leaving jobs as were hired—so zero net new jobs were added to the workforce, in other words.

This means the economy is steadily shrinking for most Americans because of the disastrous and largely ineffectual tariff policies that have increased import taxes, therefore higher inflation, the opposite of Trump’s promise to bring down prices on ‘Day One”.

The FRED graph shows just how consumers timed their purchases with the tariffs. Sales had plunged in May when the April 2 retaliatory tariffs were announced on all 180 countries in the world, some mostly inhabited by birds. Then Trump’s TACO tactics kicked in postponing them for 60 days, then raising them again when countries refused to meet his deadline for deals.

Also, November was the last month consumers splurged for the holidays so annual sales dropped from 3.1 percent to just 2.1 percent in just one month, when annual retail sales usually increase from 3-6 percent in good times.

My guess is that the AI build out of new energy centers won’t help inflation for a long time, if ever, or create many jobs in the near future, So Trump is saying we must lower interest rates to boost some growth and keep consumers happy. But inflation may not behave since concentrating so much wealth in AI investment with little return to show for it in the near term, may raise inflation.

Or, what will consumers ultimately do if Trump can’t stop playing the tariff game in his attempt to twist arms to achieve his ultimate goal of dominating friends and neighbors rather than cooperating with them?

The Trumper bet is that this year will bring more consumer benefits with the Fed’s new Chairman in May wanting to push interest rates lower as well as the tax breaks in Repub’s Big Beautiful Tax Bill.

In Nobel economist Paul Krugman’s words, “So am I saying that the argument that AI justifies rate cuts is dishonest, that AI has become the last refuge of scoundrels? Why yes, I am.”

So what could go wrong?

Harlan Green © 2026

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Will Consumers Recover?

Financial FAQs

“Retail trade sales were up 0.6 percent (±0.5 percent) from October 2025, and up 3.1 percent (±0.5 percent) from last year. Nonstore retailers were up 7.2 percent (±1.2 percent) from last year, while food service and drinking places were up 4.9 percent (±1.8 percent) from November 2024.” US Census Bureau

FREDretailsales

Retail sales were choppy in 2025, to say the least. Even the slight uptick in November after two months of contraction won’t stop President Trump’s wholesale destruction of the U.S. economy.

Sales declined or were barely positive in six of 11 months through November 2025, per the FRED graph of monthly retail sales and the future doesn’t look brighter for most Americans.

Suffering consumers and businesses have tried every which way to avoid the higher prices from Trump’s TACO tariffs (Trump Always Chickens Out) that can change on a whim and cause consumers to pull back their spending in the face of sharply rising prices caused in large part by Trump’s economic policies.

Or avoid rising insurance costs because Republicans won’t subsidize insurance premiums for some 20 million low-income Americans.

We report retail sales because it comprises approximately half of consumer spending and consumers support some two-thirds of economic growth. So consumer behavior is closely watched by economists attempting to predict the future.

But President Trump’s single-minded policy of levying import taxes on most of the world by fiat—to lower the trade gap between imports and exports which he claims is unfair—is not a good way to do business or run a country. And it continues the wholesale destruction, both at home and of our foreign alliances.

Take Trump’s return to “Drill baby drill” policies, for instance, that are not only causing Detroit automakers to lose $trillions in having to switch back to combustion engines but make more people sicker from the increased air pollution that we thought we had conquered with the EPA’s Clean Air Act.

Ford Motor has just announced a $19.5 billion charge to restructure its EV (Electronic Vehicle) and GM $7.6 trillion in losses over the past two quarters because of Trump’s war against electric vehicles, losses from higher tariff taxes on parts that go into its manufacture and removal of purchase incentives to buy EVs.

It’s hardly a surprise that many of Trump’s executive orders are ad hoc; not only meant to pay for the huge tax cuts in the Big Beautiful Tax Bill that have run up a record federal debt but to coerce our allies to pay for his empire building, such as levying 25 percent tariffs on NATO members that say they will protect Greenland from military seizure.

The question will be can consumers continue to shop in the face of so much chaos, with fewer entering the workforce? Less the half the number of jobs are being created monthly since last Fall’s government shutdown.

The Fed’s January Beige Book on the current state of our economy summed it up. Rising costs are the main elephant in the room.

“Cost pressures due to tariffs were a consistent theme across all Districts. Several contacts that initially absorbed tariff-related costs were beginning to pass them on to customers as pre-tariff inventories became depleted or as pressures to preserve margins grew more acute.”

Consumers are becoming very nervous in the face of such an unknown future, a future that depends on the actions of a man who can willfully destroy an economy to further his own interests.

Harlan Green © 2026

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Retail Sales Continue Decline

 Financial FAQs

“Advance estimates of U.S. retail and food services sales for August 2025, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $732.0 billion, up 0.6 percent (±0.4 percent) from the previous month, and up 5.0 percent (±0.5 percent) from August 2024.” Census.gov

FREDretailsales

The financial markets rallied because the US Census Bureau’s August retail sales report showed consumers were still shopping and might save the holiday season for retailers. But it couldn’t hide the damage from the tariff wars.

The FRED graph of retail sales shows the huge monthly fluctuations in sales due to the tariff uncertainty. January retail sales (i.e., when Trump was sworn in) plunged 1%. In March it rose 1.3% to get ahead of Trump’s April 2 retaliatory tariffs. Then it plunged for two more months before Trump announced the 90-day reprieve, after which it rose 1% before beginning the monthly sales decline to 0.6% in August.

And retail sales are reported without inflation factored in as I highlighted above. Today’s inflation rate is 3% and climbing, so ‘real’ retail sales on average have been increasing just 2%. And this must be in large part because of the decline in the number of shoppers.

The latest unemployment report showed there has been a -313,000 decline year-over-year in the working population mostly thanks to the ICE roundup of undocumented immigrants. Although less than 100,000 undocumented immigrants have been incarcerated by ICE, there are millions more hiding in their homes or elsewhere to avoid being arrested.

Also factor in the job decline from the Bureau of Labor Statistics (BLS). The economy created half as many new jobs from early 2024 to early 2025 in its national benchmark reassessment of the job market—a loss of -991,000 jobs—amounting to about 71,000 new jobs a month instead of the previously reported 147,000.

This decline will eventually figure into economic growth as well, since consumers power two-thirds of GDP growth.

The financial markets are in a relief rally because the tariffs (i.e., import taxes) aren’t yet stopping consumers from shopping and eating. New car and car parts sales increased in August for the third month in a row. Car shoppers have been buying more vehicles than usual for the past several months to avoid anticipated price increases in the coming months as tariffs take full effect.

Americans have also spent more on certain items that are heavily imported, such as coffee and car parts, whose prices have risen (coffee prices are up 15%, thanks in part to Trump’s 50% tariffs in Brazilian imports).

Another critical category, restaurant sales, advanced 0.7% last month. Overall restaurant spending is up 6.6% in the past three months compared with the same three-month period one year ago.

People buy more prepared food when they are confident in the economy. They eat out less when they are anxious about their jobs, according to MarketWatch’s Jeffry Bartash, a commentator I like to follow.

Wednesday’s Federal Reserve rate cut could power more consumer spending and higher inflation. Many upper income earners are willing to pay the higher tab, but not the bottom 20 percent of income earners.

And the bottom 20 percenters are in the main Trump supporters. So, I for one hope the Supreme Court disallows many of the tariffs-by-executive order Trump is foisting on the rest of the world. They are counter-productive, since their goal is not really economic. They are tax increases on all Americans to aid in paying down the huge debt incurred from Trump’s gigantic transfer of wealth in his big beautiful tax bill.

So he will use any excuse to levy them. The 50 percent Brazilian tariff is an excellent example, since Brazil imports more from the US than it exports. Trump has said he did it to attempt to influence the outcome of convicted felon buddy Jair Bolsonaro’s trial. It didn’t work, of course, as Bolsonaro is going to jail.

Trump wants to be a dictator, and a major trait of dictators is the accumulation of enormous wealth, not to “lift all boats” as JF Kennedy once said, but their own boats while the rest of US sink.

Harlan Green © 2025

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Consumers Are Unhappy

 Financial FAQs

“Consumer confidence declined for a fifth consecutive month in April, falling to levels not seen since the onset of the COVID pandemic,” said Stephanie Guichard, Senior Economist, Global Indicators at The Conference Board. “The decline was largely driven by consumers’ expectations. The three expectation components—business conditions, employment prospects, and future income—all deteriorated sharply, reflecting pervasive pessimism about the future.”

The University of Michigan’s Sentiment Survey Index has also declined for five consecutive months, from 74 to 50.8. It’s mainly about the growing inflation fears.

“Year-ahead inflation expectations surged from 6.5% last month to 7.3% this month. This month’s rise was seen among Democrats and Republicans alike. Long-run inflation expectations lifted from 4.4% in April to 4.6% in May, reflecting a particularly large monthly jump among Republicans.” Survey Director Joanne Hsu.

Why so much doom and gloom in surveys while consumers are still fully employed? Consumers don’t like uncertainty any more than businesses. and their lack of confidence could have an even larger impact on economic growth than uncertainty in the financial markets.

Consumer activity drives two-thirds of economic growth, and a recession begins when a majority begin to save more than they spend for a prolonged period. There are many ways to measure this, such as a growing cutback in retail sales.

Retail sales rose just 0.1% in April. That’s a big comedown from a 1.7% spike in March that marked the biggest increase in more than two years because consumers bought ahead of the April 2 tariff announcements that imports from all 180 countries in the world would be taxed at least 10 percent.

FREDretailsales

Retail sales account for one-third of consumer spending and and shoppers have been hunting for more bargains. Sales have declined in three of the past 13 months as portrayed in the FRED graph and were flat another three months, but are still 4.7 percent higher in a year.

Motor vehicle and parts dealers were up 9.4 percent (±1.8 percent) from last year because consumers knew that motor vehicle import taxes (i.e., tariffs) of at least 25 percent had already been announced, while food service and drinking places were up 7.8 percent (±1.8 percent) from April 2024.

The Conference Board’s Index of Leading Economic Indicators (LEI), another growth indicator that attempts to predict future growth, showed more weakness.

“The US LEI for March pointed to slowing economic activity ahead,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “March’s decline was concentrated among three components that weakened amid soaring economic uncertainty ahead of pending tariff announcements: 1) consumer expectations dropped further, 2) stock prices recorded their largest monthly decline since September 2022, and 3) new orders in manufacturing softened.

Manufacturing will be hardest hit, because Trump’s tariffs will bring higher inflation and interest rates, which especially hurts manufacturers because they need to borrow lots of money to build their factories. The LEI survey reported new manufacturing orders were already softening.

This will defeat what he says is the main reason for tariffs—bringing manufacturers home—as will the immigration crackdown, which reduces the working age population at a time of worker shortage. The Manufacturing Institute and Deloitte accounting firm have projected that manufacturing will need an additional 3.8 million workers by 2033. Where will they come from?

In fact, this tells us it’s not the real reason for his tariffs, since he is more concerned about cutting taxes and federal spending that would also disincentivize more domestic manufacturing investment.

No, it looks like Trump’s chaotic tariff war will create bottlenecks last seen during the COVID-19 pandemic or worse, unless he relents.

We know what those supply interruptions did to economic growth during the pandemic and why it took the succeeding Biden administration four years to fix with its bipartisan New, New Deal legislation.

Harlan Green © 2025

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Q4 Economic Growth Continues

 Popular Economics Weekly

Real gross domestic product (GDP) increased at an annual rate of 2.3 percent in the fourth quarter of 2024 (October, November, and December), according to the advance estimate released by the U.S. Bureau of Economic Analysis. In the third quarter, real GDP increased 3.1 percent.

BEA.gov/Q4gdp

Economic growth is still looking good in the fourth quarter of 2024, with real (inflation adjusted) GDP increasing at 2.3 percent. It was mostly due to consumer spending over the holidays that rose 4.2 percent, largely because December retail sales soared, I reported earlier.

Consumers are not quitting their shopping habits, in other words, and it contributes some 70 percent to the GDP, while corporate profits are growing at a multi-decade high, which is why workers are still fully employed.

So, economists are now looking at the New Year predictions for economic growth. The Atlanta Federal Reserve’s GDPNow prediction for Q1 2025 has been going all over the place.

It now says real GDP growth is 2.9 percent on February 5, down from 3.9 percent on February 3. “…after recent releases from the Institute for Supply Management, the US Bureau of Economic Analysis, and the US Census Bureau, of lower “first-quarter real personal consumption expenditures growth and real gross private domestic investment growth.”

But inflation is still coming down, a good thing, since the tariffs to come will push prices higher on the taxed imports. It is especially true with the important Personal Consumption Expenditure Index the Fed likes to use to measure inflation.

“The price index for gross domestic purchases increased 2.3 percent in 2024, compared with an increase of 3.3 percent in 2023. The PCE price index increased 2.5 percent, compared with an increase of 3.8 percent. Excluding food and energy prices, the PCE price index increased 2.8 percent, compared with an increase of 4.1 percent.

Why so much fluctuation? It’s because of the presidential election, of course. There is tremendous confusion over what the Trump administration wants for economic growth. Reducing the budget deficit means finding budget cuts, which could slow down more business investment. Especially when Trump wants it to be in more fossil fuel production when we already have a surplus of oil and natural gas.

So in spite of concerns over their jobs that is showing up in consumer sentiment surveys, consumers keep spending according to the University of Michigan survey.

“Consumer sentiment confirmed its early-month reading, rising for the fifth consecutive month and reaching its highest value since April 2024. Buying conditions exhibited a particularly strong 32% improvement, primarily due to a surge in consumers expecting future price increases for large purchases. The expectations index continued the post-election re-calibration that began last month, climbing for Republicans and declining for Democrats in December,” said Survey Director Joanne Hsu.

And what will Friday’s unemployment report look like. MarketWatch’s Jeffry Bartash reports that weekly initial jobless claims are back to normal, with the effect of the LA fires diminished. New jobless claims, a proxy for layoffs, increased by 11,000 to 219,000 in the seven days that ended Feb. 1, the government said, which is in the normal range.

We could still have a very good 2025 year, in other words. Both the service and manufacturing sectors are growing, with manufacturing expanding after a years-long slump.

The Manufacturing PMI^® rose to 50.9 percent in January, 1.7 percentage points higher compared to the seasonally adjusted 49.2 percent recorded in December. It was the 57th month of expansion after one month of contraction in April 2020, per Timothy Fiore, Chair of the survey committee.

And lastly, private payrolls company ADP said U.S. businesses created a solid 183,000 new jobs in January, and wages rose 4.8 percent, which showed the labor market was still growing.

This is why financial market indexes are at record levels, despite the looming uncertainties. It looks like some irrational exuberance is motivating investors who rely more on rumors than research, though corporate profits as a percentage of GDP are rising 11 percent these days, according to one analyst, Deutsche Bank strategist Jim Reid, and as cited by MarketWatch’s William Watts.

So irrational exuberance will be the norm this year, which in general means either follow the herd, or hunker down and wait out the chaos.

Harlan Green © 2025

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Retail Sales Boost Growth

 Financial FAQs

“Advance estimates of U.S. retail and food services sales for December 2024, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $729.2 billion, an increase of 0.4 percent (±0.5 percent)* from the previous month, and up 3.9 percent (±0.5 percent) from December 2023,”according to the US Census Bureau.

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Retail sales make up one-third of spending, and during good times such as after the last two recessions, soared above 8 percent annually. But the current 3.9 percent annual spending rise is not adjusted for inflation, so the sales rate is mostly due to inflation that is stuck in the 2 to 3 percent range.

But stocks and some bonds are rallying as consumers keep spending because they are fully employed and continue to have savings left over from the government’s post-pandemic aid programs.

It’s also the reason Federal Reserve Banks, such as the Atlanta Fed’s GDPNow estimate, are predicting 3 percent GDP growth again in the fourth quarter as seen in their graph. This will be the third consecutive quarter of 3 percent GDP growth.

AtlantaFed

And if consumers continue to shop as they have been, inflation won’t get any better in 2025. In fact, if Trump follows through on his tariff promises, inflation may get worse and maybe even cause the US Fed to raise interest rates again. It’s going to be an interesting battle between the Trump administration wanting to push rates lower and the Fed wanting to push inflation lower. They aren’t compatible, needless to say.

We should probably call this another era of irrational exuberance, as former Fed Chair Alan Greenspan foresaw in 1996 preceding the 2000 Dot-com bubble. It really means investors tend to follow the herd because most of their information isn’t based on research, but “hearsay and word-of-mouth”, in the words of Nobel Laureate Robert Shiller.

Irrational exuberance can be a terrible thing and has been studied by more than one Nobel Laureate. We are still recovering from the Great Recession and consequent housing shortage because of it.

So the moral should be: “Don’t believe in all the misinformation you hear,” and will be hearing this year!

Harlan Green © 2025

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Holiday Sales Boom

 Popular Economics Weekly

FREDretailsales

The Commerce Department reported Retail trade sales were up 0.4 percent (±0.5 percent)* from September 2024, and up 2.6 percent (±0.5 percent) from last year. Nonstore retailers were up 7.0 percent (±1.4 percent) from last year, while food services and drinking places were up 4.3 percent (±2.1 percent) from October 2023

Sales of new cars and trucks jumped 1.6% in October to lead the charge among retailers. Auto sales account for one-fifth of all retail sales. Restaurant sales are also booming, so maybe consumers are breathing a great sigh of relief that the election is over.

So holiday sales are strong even though it will be two weeks before we know if the 12,000 new payroll jobs is a fluke in the October unemployment report because of the hurricane damage and 30,000 striking Boeing machinists, which is now settled.

Even the east coast docks’ strike was settled. Was it because the strikers wanted to enjoy the upcoming holidays with more money in their pockets? We won’t know if the September jobs report was a fluke, as I said, until October’s numbers come out, but Fed Chair Powell is now saying the Fed is not in a hurry to lower interest rates further if retail sales stay strong, especially with stronger inflation news.

Both wholesale inflation and retail inflation rates were higher than forecast in October, which is another sign that consumer spending hasn’t slowed, and will continue to push up prices.

So, was too high inflation the main reason Republicans won a landslide, as exit polls have said? Then why do consumers keep shopping, and pushing up prices even higher, if a majority was so unhappy with their costs?

Maybe there were other, more cultural factors that kept consumers from realizing how lucky we are to have the fastest growing economy in the western world with no worries about energy shortages.

I find it hard to believe that most consumers were unhappy with their own circumstances, since they have spent so much for leisure activities.

Americans continue to signal that travel is splurge-worthy and are again setting new records for vacation spending in 2024, according to Allianz Partners USA, a travel insurance company. Americans have more than doubled their projected summer vacation spending since the inception of the pandemic. The 2024 figure represents an approximately 3.5% increase over last year, but a whopping 118% jump compared to 2019.

Maybe consumers want to forget about the results of the presidential race that has left the country still split in two? But the majority was mad enough to bring in Donald Trump once again in a big way, after voting him out four years ago for doing so little.

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Consumers Are Still Solvent?

 Popular Economics Weekly

FREDretailfoodservices

My recent blogs have been questioning how long consumers can keep shopping for good reason; their debts have been piling up, which seems to mean they have been able to borrow enough to stay in the game.

I occasionally quote Roosevelt’s very smart Federal Reserve Chairman Marriner Eccles who made an apocryphal statement on debt during the Great Depression—which in essence explained why it became the ‘Great’ Depression and explains every recession since then.

“The United States economy is like a poker game where the chips have become concentrated in fewer and fewer hands, and where the other fellows can stay in the game only by borrowing. When their credit runs out the game will stop.”

The credit of most Americans ran out when their banks failed in the 1930s because they didn’t yet have federal deposit insurance or today’s capital requirements, and 25% were jobless.

It was also the end of the last Gilded Age, when the Morgans, Rockefellers, and Vanderbilts held most of the wealth and labor unions were much weaker.

We may not be in as much danger today though four large banks have already failed that carried too many deposits not insured by the FDIC, or other guarantors. And cracks are appearing in the credit markets where the loan default rates of lower income folk are rising who tend to spend most or all their incomes.

We are living in another Gilded Age with record income inequality and ordinary Americans having to pay higher tax rates that most of the millionaires and billionaires since the 1980s.

Retail and food sales are a good indicator of consumer health, and is subject to large fluctuations. That’s why just reported July retail sales jumped +1.0%, up from a -0.2% decline in June. (It also plunged -1.1% earlier this year in January.)

I  believe the current and sudden jump in sales might be because of consumers’ hubris, a bit of irrational exuberance, because they feel their jobs remain safe and the US economy has been fully employed for the past two years, so they are saving very little of their income.

But full employment may not last much longer, and consumers might be sensing this in consumer confidence surveys. Consumer sentiment picked up slightly for the first time in five months, say the latest headlines.

But according to the latest University of Michigan survey, “For the second straight month, consumer sentiment is essentially unchanged. July’s reading was a statistically insignificant 2 index points below last month, well within the margin of error. Although sentiment is more than 30% above the trough from June 2022, it remains stubbornly subdued.”

The Conference Board’s confidence survey said as much: “Compared to last month, consumers were somewhat less pessimistic about the future. Expectations for future income improved slightly, but consumers remained generally negative about business and employment conditions ahead.”

So, the question remains how much longer can consumers keep spending as they have?

The unemployment rate has been steadily rising from its low in January 2023 of 3.4 percent to 4.3 percent in July 2024. And annual hourly wage increases have declined to 3.6 percent.

I said of last month’s unemployment report that it was alarming because most new jobs were in the lower paying service sector that had 80,000 of the 114,000 jobs total, mostly in Leisure activities, Education & health care.

This is where consumers spend most of their Dollars and so it means job growth is still dependent on consumer spending, and consumers have had to borrow like crazy to keep spending, which can’t go on forever.

That is why financial markets are now betting the Fed will begin to cut interest rates at its September FOMC meeting.

Retail inflation has dropped below 3 percent for the first time since 2022 as measured by the U.S. Consumer Price Index (CPI). It has had two months of zero price increases, which could have been predicted because consumers have known for months that stores were discounting and shopped more at big box retailers like Target, Walmart and Costco.

So there seems to be some cognitive dissonance between what consumers are doing (i.e., continuing to spend) and what they are saying in confidence polls. Is that a danger sign? Might they suddenly stop spending, because “the game will stop” in Fed Chair Eccles words?

It depends on the health of our banking system as well. We’ll have to wait and see.

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Retail Sales Falter

 The Mortgage Corner

Fed Chair Powell has said it again. Second-quarter economic data including last week’s consumer price report “do add somewhat” to confidence that inflation is heading down to the central bank’s 2 percent goal at an Economic Club of Washington interview— a condition for rate cuts, report various media. He repeated that labor markets are now in a “better balance,” and an unexpected weakening in labor markets would also be a reason to adjust rates.

That is already happening with the latest revisions to unemployment data and the unemployment rate now up to 4.1 percent. It ticked up to 4.1 percent in June from 3.8 percent in March. The sudden rise in the unemployment rate in the middle of the work year should alarm Fed officials.

Further evidence of slowing job growth is that average hourly wage growth fell to 3.9 percent. It makes up to two-thirds of production costs for most businesses and is now the main driver of inflation.

1another reason a rate cut seems more likely is that retail sales were unchanged in June once again. It actually fell when inflation is factored. It’s now been flat for three consecutive months.

FREDretail

Advance of U.S. retail and food services sales for June 2024, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $704.3 billion, virtually unchanged (±0.5 percent)* from the previous month, but up 2.3 percent (±0.5 percent) above June 2023. Total sales for the April 2024 through June 2024 period were up 2.5 percent (±0.5 percent) from the same period a year ago.

Housing is another reason a rate cut is needed sooner. Though for sale inventories are up to a 3.7-month supply, according to Realtors, builders have been slashing prices because of the sky-high mortgage rates.

Nearly one third of home sellers in Sun Belt cities are slashing their asking prices as the number of properties for sale in those markets surges.

The share of home listings with a price cut was the highest in metropolitan areas across the South as homeowners competed to entice buyers, according to June monthly data from real-estate company Realtor.com. The report includes data for home listings in the 50 largest U.S. metropolitan areas going back to 2016, said the NAR.

Total existing-home sales¹ – completed transactions that include single-family homes, townhomes, condominiums and co-ops – retreated 0.7% from April to a seasonally adjusted annual rate of 4.11 million in May. Year-over-year, sales were down from 4.23 million in May 2023.

"Eventually, more inventory will help boost home sales and tame home price gains in the upcoming months," said NAR Chief Economist Lawrence Yun. "Increased housing supply spells good news for consumers who want to see more properties before making purchasing decisions."

It is also putting more affordable housing on the market. In the NAR’s June report, as in the previous four months, the growth in homes particularly priced in the $200,000 to $350,000 range outpaced all other price categories, as home inventory in this range grew by 50.0 percent compared with last year, surpassing even last month’s high 45.1 percent growth rate. This increase is again primarily fueled by a greater availability of smaller and more affordable homes in the South.

Total housing inventory² registered at the end of May was 1.28 million units, up 6.7 percent from April and 18.5 percent from one year ago (1.08 million). The 3.7-month supply at the current sales pace is up from 3.5 months in April and 3.1 months in May 2023.

All the discounting won’t cure the housing shortage but it will create more affordable housing.

Consumer spending itself has now slowed for three consecutive months because of too high interest rates, as has the job market, which has now taken a dangerous downturn.

So why wait for a September rate cut, as many are predicting? The Fed’s FOMC meets next in July.

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

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Retail Sales Falter--What Can Follow?

 Financial FAQs

American consumers are tiring after two years of no relief from higher prices and interest rates. They are now looking for bargains everywhere in the latest retail sales report from the Census Bureau.

It’s the second month of the second quarter that sales have disappointed, and consumer spending is a large part of Q2 growth.

FREDretailsales

“Advance estimates of U.S. retail and food services sales for May 2024, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $703.1 billion, up 0.1 percent (±0.4 percent) * from the previous month, and up 2.3 percent (±0.5 percent) above May 2023,” said the U.S. Census Bureau.

This was in part because gas prices had declined -2.2 percent. Revised April retail sales had declined -0.2 percent. The retail report is going to boost both stock and bond prices, which means interest rates should continue to decline. It also means consumers are spending less on travel and entertainment, parts of the service sector that have been powering most of the economic growth to date.

The biggest negative in the May retail report was a 0.4% decline in spending at restaurants. Restaurant spending has fallen in four of the past six months for the first time since the pandemic. Sales also fell at home centers, grocery stores and stores that sell furniture — a residue of rising housing prices and high mortgage rates.

Yet sales rose at internet retailers, clothing outlets and big-box electronics stores, suggesting Americans still have some money left over to pay for so-called discretionary goods, or things people want, rather than need, to buy.

But manufacturing is taking up some of the slack as overall industrial production rose 0.9% in May, the Federal Reserve also reported on Tuesday. That is the biggest gain since last July. The manufacturing component rose 0.9% in May after a 0.4% fall in the prior month.

Part of the boost was from motor vehicles and parts output that jumped 0.6% after a 1.9% drop in the prior month. Excluding cars, total industrial output increased 0.7%, so auto sales are helping to boost growth.

What does it mean for Q2 economic growth? Estimates are still all over the map. The latest data was good enough to keep the Atlanta Fed’s GDPNow estimate of Q2 growth at 3.1 percent, up from 2.6 percent on June 6. It remained above 3 percent because a drop in PCE (consumer spending) was outweighed by a rise in second-quarter real gross private domestic investment growth (i.e., replacing inventory and buying new equipment) and second-quarter real government spending growth (on such as combatting climate change and modernizing the American economy).

Fed officials now must decide if they want to slow economic growth even more, and maybe risk a downturn come the fall. Do they want to spoil the holidays for shoppers by not cutting interest rates? I wonder if they will dare in this election year.

Harlan Green © 2024

Harlan Green on Twitter: https://twitter.com/HarlanGreen

No More Inflation?

 Popular Economics Weekly

It will probably be hard to believe for those scarred by the post-pandemic inflation scare that believe inflation isn’t declining, but there was no inflation increase in May for both wholesale (PPI) and retail (CPI) inflation indexes.

Yes, for the first time in two years the Consumer Prices Index was unchanged, a zero-point inflation rise. Wholesale inflation, the Producer Price Index out the next day was unchanged for the first time in one year.

FREDcpi

What does that tell us? Firstly, gas prices and housing (rents) have been declining of late after an initial uptick in the first quarter due to various shortages. Consumers are also becoming more cautious when they shop with major retailers like Target, Walmart, and grocery chains that are beginning to discount their products as shoppers look for bargains.

It will cause bonds in particular to rally because interest rates, including mortgages, finally begin to decline from their two-year highs.

FREDppi

U.S. wholesale (PPI) prices fell in May for the second time in three months — thanks partly to lower gas prices — in perhaps another sign an upturn in inflation earlier this year is fading. The producer price index actually fell 0.2% last month, the government said Thursday.

The retail and wholesale graphs illustrate the sudden drop in inflation, and the fact that the Q1 shortages were temporary. So, now it’s largely leisure activities—e.g., dining out, travel—in the service sector of the American economy, and housing rents that have kept consumers spending and the overall inflation rates higher.

This all fits in neatly with why the Fed believes it must keep interest rates high enough to slow down consumer spending even more, so that borrowing costs, for instance, remain intolerably high (i.e., with 8.5% Prime Rate). And that’s probably why last month’s retail sales were flat.

The cost of goods dropped 0.8 percent largely because of falling gas prices. Food prices also declined. The cost of services, the biggest driver of inflation, was unchanged in May after a big increase in the prior month.

The gradual slowdown in activity is obviously working. Weekly initial claims for unemployment insurance have been rising, signaling a slowdown in hiring. Initial jobless claims rose 13,000 — to 242,000 — in the week ending June 8, the Labor Department said also on Thursday.  That’s the highest level of claims since last August.

What’s keeping the Fed from cutting rates is that wages are still climbing 4.1 percent and Fed officials believe, for some reason, that the unemployment rate should rise above 4 percent—i.e., more employees must lose their jobs for inflation to decline further.

Housing rents, the main ingredient of retail CPI inflation, won’t come down until more housing is built. But that can’t happen until lower interest rates stimulate both the construction and sales of more homes!

That’s playing brinkmanship, in my opinion. It’s not taking into account the possibility of a major geopolitical surprise spooking financial markets, or consumers who are no longer flush with savings from the pandemic aid.

It could be China invading Taiwan, for instance? One can also imagine what might happen if North Korea accidentally sets off a nuclear confrontation. The Russian Navy is now also making regular visits to Cuba, and President Kennedy’s Russian missile crisis is not a very distant memory.

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Whose Inflation Is Too High?

 The Mortgage Corner

Declining inflation has stalled in the first quarter, which is hurting prospects for any Fed rate cuts, and causing consumers to buy less. The inflation rate is currently stuck in the 3 percent range, though much lower for goods earlier in the supply chain, so large retailers like Walmart and Target are having to cut prices.

Monthly retail sales didn’t increase at all in May, after two consecutive months of 0.8 percent growth and almost 3 percent annual growth.

Walmart said on May 16 that it has rolled back prices on nearly 7,000 items in its stores, reports CNN, noting deflationary trends in general merchandise.

“Our combination of everyday low prices plus a large number of rollbacks is resonating” with consumers, Walmart CEO Doug McMillon said on a call with analysts.

CNN also reported that Target slashed prices on more than 1,500 items, ranging from laundry detergent to cat food to sunscreen, with thousands more price cuts expected over the summer.

It’s a sign that’s made Federal Reserve Governors more hopeful inflation will continue to decline, and prices even begin to fall, rather than continue to rise more slowly.

Federal Reserve officials at their last policy meeting indicated they still had faith price pressures would ease, if only slowly, according to the minutes of the central bank’s April 30-May 1 session.

"Participants ... noted that they continued to expect that inflation would return to 2% over the medium term," the minutes said, but "the disinflation would likely take longer than previously thought."

AtlantaFed

Inflation trends seem to be in the eye of the beholder. Businesses are now seeing much lower inflation, according to recent surveys. Year-ahead inflation expectations had fallen to 2.3 percent in May 2024 from as high as 3.8 percent in March 2022 for businesses, according to the Atlanta Federal Reserve.

Whereas the Federal Reserve Bank of New York’s Center for Microeconomic Data today released the April 2024 Survey of Consumer Expectations, which went in the opposite direction.

It shows that inflation expectations increased at the short-term and longer-term horizons, while decreasing at the medium-term horizon: to 3.3% from 3.0% at the one-year horizon (remaining below its 12-month trailing average of 3.5%).

The main culprit seems to be housing prices. “Median home price growth expectations increased to 3.3% after remaining unchanged at 3.0% for seven consecutive months. This is the highest reading of the series since July 2022,” said the NY Fed.

Year-ahead consumer commodity price expectations also rose across the board in April for gas, food, medical care, and college education.

Why aren’t consumers seeing the lower inflation expectations of businesses? Target and Walmart are telling us why. Simply put, retail prices are much higher than the raw cost of goods and services charged to businesses for several reasons. There’s the transportation and distribution costs, for starters, and profit margin that retailers must retain to stay in business.

The truth is that consumers are seeing higher costs than businesses and are beginning to rebel by choosing cheaper products. It also refutes an economic maxim about consumer behavior that higher inflation expectations will cause consumers to spend more, not less.

There is some good news for consumers. New-home prices are falling as the supply of new homes has increased.

Sales of newly built, single-family homes in April fell 4.7% to a 634,000 seasonally adjusted annual rate from a downwardly revised reading in March, according to newly released data from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. The pace of new home sales in April is down 7.7% from a year earlier.

The median new home sale price in April was $433,500, down 1.4% from March, and up 3.9% compared to a year ago. This is because of the increased supply. There’s a 9.1-month supply of new homes for sale.

Dear US Fed Governors, please pay attention to this. Shoppers can act rationally when their pocketbook size is at risk!

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Retail Sales Decline Worrying

Financial FAQs

The bad news might be good news, though it presages further grief for some consumers. Retail sales didn’t increase at all in April, and the Consumers Price Index showed lower inflation, with its annual rate dropping to 3.4 percent from 3.5 percent.

The bad news-good news had financial markets rallying, since lower retail sales and CPI inflation were a sign of slowing growth that have traders now betting on at least two Fed rate cuts this year, instead of maybe no rate cuts if inflation doesn’t continue to edge closer to the Fed’s 2 percent target rate.

Retail sales jumped 3.1% at gas stations, which offset weakness in several sectors. Sales at furniture stores fell 0.5%, car sales fell 0.8% and internet sales were down 1.2%., said MarketWatch.

Why are shoppers not shopping as much after two months of great gains, per the St. Louis Fed’s (FRED) graph?

FREDretailsales

Consumer sentiment has soured, for starters. And this should be a signal to Fed officials that credit has become too restrictive. Borrowing costs have skyrocketed, especially with middle and low-income shoppers that must borrow with the Prime Rate still 8.5 percent that controls credit card and installment debt.

The University of Michigan’s April sentiment survey reported “While consumers had been reserving judgment for the past few months, they now perceive negative developments on a number of dimensions. They expressed worries that inflation, unemployment and interest rates may all be moving in an unfavorable direction in the year ahead.”

Their pessimism was confirmed by the Federal Reserve in its monthly survey of consumer credit. Total consumer credit had risen more slowly in March; at a 1.5% annual rate, down from a 3.6% rate in the prior month. Consumers borrowed a total $6.3 billion in credit card and installment debt in March, following a $15 billion gain in February.

What are consumers sensing? A recent NBER Working Paper 32006 that studied European consumers found that “individuals’ fears of becoming unemployed, as tracked in household surveys, rose in the months before both the Great Recession and the COVID-19 recession.”

Why wouldn’t that be the case with American consumers? Then add a mounting unease from wars and a warming climate, not to speak of the upcoming US Presidential election.

Fed Chair Powell is doing his best to talk down the fears of a ‘sticky’ inflation rate that might keep Fed officials from giving borrowers some relief by cutting rates sooner.

Powell’s latest remarks, delivered in Amsterdam at a Foreign Bankers conference, indicated he expected inflation to cool to the level of the low monthly inflation points seen late last year, said MarketWatch. “However, I would say my confidence [in that forecast] is not as high as it was, having seen the readings in the first three months of the year,” said Powell.

In fact, there are other signs of a slowdown that consumers will find hard to miss. Weekly initial jobless claims have risen of late, jumping from 209,000 in April to 231,000 in the first week of May. It was hovering between 210,000 to 220,000 last fall.

And both Institute for Supply Management Indexes (ISM) that measure overall business activity have fallen of late. The ISM’s service sector contracted below 50 percent for the first time since December 2022, and its index that measures the manufacturing sector activity has been positive just one month over the past 17 months.

So, we mustn’t blame consumers’ growing pessimism, who have held on and been the backbone of the post-pandemic recovery, for saying enough is enough and it’s time for the Fed to release its chokehold on the economy, or else.

So much depends on their confidence in a better future.

Harlan Green © 2024

Harlan Green on Twitter: https://twitter.com/HarlanGreen 

Retail Sales Boost Q1 Growth

 Financial FAQs

Consumers haven’t slowed shopping, even during tax season. They keep boosting economic growth which is edging above 2 percent annualized predictions again.

FREDretailsales

Retail trade sales were up 0.8 percent (±0.5 percent) from February 2024, and up 3.6 percent (±0.5 percent) above last year, said the US Census Bureau. Nonstore retailers were up 11.3 percent (±1.6 percent) from last year, while food services and drinking places were up 6.5 percent (±2.1 percent) from March 2023.

The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2024 rose 2.8 percent on April 15, up from 2.4 percent on April 10, “…after increases in nowcasts of first-quarter real personal consumption expenditures growth and first-quarter real gross private domestic investment growth.”

This is at the high end of Blue-Chip economists’ estimates; no wonder with such robust consumer spending, but this confuses the inflation picture.

It is an economic fact that indicates the US economy is doing very well, and that Main Streeters should believe it, contrary to the polls, I said last week. But will economic facts win out over the irrational pessimism showing up in consumer polls? The facts win out in retail sales.

The problem with the irrational pessimism measured by polls is that it seems to be largely based on the inflation picture. The fluctuating inflation indexes are higher at the moment because of housing rents that are adjusted once per year.

FREDHICP

But another inflation index, core CPI inflation without food, energy, tobacco or alcohol, the Harmonized Index of Consumer Prices (HICP) used by Europeans as a more accurate indicator of longer term inflation, indicates the inflation rate has been at or below 2 percent since June 2023, like the Producer Price Index.

Then why does the Fed keep saying they are unsure inflation has been tamed when rents are outside of their control? Because of “unknown knowns,” to paraphrase former Bush Defense Secretary Donald Rumsfeld when he was attempting to justify the invasion of Iraq?

He said in attempting to justify the unknown fact that Saddam Hussein had weapons of mass destruction that: “There are known knowns, things we know that we know; and there are known unknowns, things that we know we don't know. But there are also unknown unknowns, things we do not know we don't know.”

How is that a justification for anything? The same uncertainty can be said of unknown future economic events, so keeping interest rates at their maximum 5.25 percent and the Wall Street Prime Rate at 8.5 percent to suppress consumer borrowing when not knowing what are the future shocks that could again disrupt supply change, like the Covid pandemic and Ukraine war, are “things we do not know we don’t know.”

But with fixed 30-year mortgage rates again above 7 percent, we know it is hurting the housing market at a time when more housing is desperately needed.

Atlanta Fed President Rafael Bostick has been sounding the alarm on the housing shortage yet has been one of the Fed Governors reluctant to support lowering the Fed’s interest rates.

Bostic said in a recent conference, “Nationally, a household that earns the median income—roughly $75,000 a year—must spend 41 percent of that just to own the median-priced home, which would cost about $359,000. That percentage far exceeds the standard threshold for affordability, which is 30 percent.”

This is not an ‘unknown known’, since we know that lower interest rates would boost housing construction and hence supply, thereby bringing down rents and housing prices. Privately‐owned housing starts in March were14.7 percent below the revised February estimate . Single‐family housing starts in March were 12.4 percent below the revised February estimate.

Can we blame consumers for doubting the sincerity of the Fed Governors about inflation when they contradict themselves?

Harlan Green © 2024

Harlan Green on Twitter: https://twitter.com/HarlanGreen

Retail Inflation Is the Problem

 Popular Economics Weekly

There is a reason the Biden administration wants to prevent the merger of Kroger and Albertsons Supermarket chains. It lowers competition at a time when the largest retailers are now responsible for much of the inflation that has fueled the Fed’s reluctance to lower interest rates.

How do we know that? Retail companies such as Walmart, Home Depot, Costco, Lowes, CVS, and Target have reported record profits since the Pandemic, according to a recent report by Accountable.us, a nonpartisan 501(c)3 organization that reports on “special interests that too often wield unchecked power and influence in Washington and beyond.”

It reports that “a new analysis of earnings data of the ten largest U.S. retailers by market capitalization finding that they all raised consumer prices while collectively reporting $24.6 billion in increased profits during their most recent fiscal years. These same companies also ramped up spending on shareholder handouts by nearly $45 billion year-over-year for a total of $79.1 billion.”

FREDppi

This is while wholesale PPI price inflation for the raw materials that go into retail products is close to zero. The PPI approached zero percent in June 2023 and has remained below 2 percent annually since then. Supply may become oversupply, in other words, continuing to bring down wholesale prices.

This is opposed to the most recent Consumer Price Index of retail prices that is still hot, with annual inflation rate up slightly from 3.1 to 3.2 percent in February, and core inflation with food and energy prices now 3.8 percent.

It highlights the chasm between wholesale and retail prices that must factor in labor and capital costs. But those costs remain largely constant, so much of the difference must come from higher profit margins of retailers.

Voices are now growing louder for an earlier rate cut than in June that markets have currently predicted, in part because retail sales are faltering. Retail sales rose 0.6% in February from the previous month, according to Census Bureau data, but January retail sales previously posted a surprise -1.1% decrease. They have been trending downward since September 2023.

FREDretailsales

Retail inflation is largely due to corporate greed, which is out of the Fed’s control.

So there are now voices saying the Fed should pay less attention to its target rate of 2 percent and reduce interest rates sooner. “Given that the labor market is tight, the economy is running well and corporate fundamentals are looking pretty good, I’m not sure we need 2% inflation,” said another economist in a MarketWatch interview.

The chorus for rate cuts will grow louder as further weaknesses in retail sales appear in coming months.

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Slower Retail Sales, Lower Inflation?

 Financial FAQs

The New Year is proving to have lots of ups and downs as consumer spending slows from the holidays. Tax season is afoot, of course, a time when consumers tend to save more and spend less.

That’s why retail sales fell sharply in January, while November and December sales were revised down. Financial markets rallied because it could mean the Fed cuts rates sooner if such weakness continues.

Wholesale inflation has also fallen sharply, is now close to zero percent annually, yet the financial markets continue to misread the data, fearing the Fed will put off rate cuts until later this year.

The Calculated Risk-enhanced retail sales graph is a great picture of what has happened since the COVID pandemic—incredible swings in activity that continue to confuse both Main Street and Wall Street, thereby mudding the economic waters.

FRED/BLS.gov/CalculatedRisk

“Advance estimates of U.S. retail and food services sales for January 2024, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $700.3 billion, down 0.8 percent from the previous month, and up 0.6 percent above January 2023,” said the Census Bureau.

Sales were up 3.1 percent from a year ago, below the 5 percent longer term average. Should this be worrisome? It isn’t adjusted for inflation, so retail sales were flat when adjusted for retail inflation that is running at 3 percent.

It means consumers could be taking a break in the first quarter of 2024. Why not? Blizzards in the northern states, tornadoes in the south and midwest, are certainly reasons for consumers to take a pause.

Meanwhile the Producer Price Index (PPI) for wholesale goods and services continues to plunge, as I said. This is the cost of goods and services that go into retail (CPI) inflation, which means overall inflation will continue to fall as well.

PPI Final Demand is now up just 0.9 percent in 12 months, far below the Fed’s 2 percent target. It jumped 0.6 percent in January but monthly prices declined 0.1 percent in December 2023 and advanced just 0.1 percent in November.

FREDppi

That is why economists are saying the inflation dragon has been slayed and consumer confidence is improving. One hint of what’s in store for the New Year was the New York Fed’s 2024 Survey of Consumer Expectations, which shows improvements in households’ perceptions and expectations of their financial conditions and credit availability.

Of particular note was that perceptions about households’ current financial situations improved in January with more respondents reporting being better off than a year ago and fewer respondents reporting being worse off. The percentage of respondents expecting to be financially the same or better off 12 months from now is 76.5%, its highest level since September 2021. (my emphasis)

This is a major reason consumer confidence has been rising over the past several months.

I reported last week that the University of Michigan’s sentiment survey, for instance, also reported consumers much more optimistic about their finances and the inflation outlook.

“Consumer sentiment confirmed its early month reading, surging 13% to reach its highest level since July 2021, reflecting improvements in the outlook for both inflation and personal incomes,” said survey director Joanne Hsu. “January's gain has been exceeded only five times since 1978, one of which was last month at an even larger increase of 14%.”

So contrary to what the financial market are reacting to, both wholesale and retrial inflation continues to trend down. But it’s a bumpy ride,, one Fed Governor warned, and as illustrated in the graphs.

Harlan Green © 2024

Harlan Green on Twitter: https://twitter.com/HarlanGreen

No Recession At All?

 Popular Economics Weekly

Ho hum, another good economic number. December retail sales are telling us why we have avoided a recession this year. It’s because consumers have increased rather than reduced their spending ways.

Sales at retailers jumped +0.6 percent in December, 4.8 percent annually, to cap off a very good holiday shopping season and underscore the resilience of the U.S. economy in 2023. November sales had risen +0.3 percent, 3 percent annually.

How is that possible with Fed officials still refusing to say exactly when they will even begin to cut rates this year? Retail sales aren’t adjusted for inflation, so it means consumers are able to spend just ahead of inflation, which is running approximately 3 percent annually.

FREDretailtradesales

Why then are consumers still shopping? Americans are tully employed, and average hourly wages are rising faster than inflation (+4.1%). Inflation has been falling particularly sharply over the past 6 months (1.9%-2.5%, depending on which inflation measure we look at).

In fact, the Producer Price Index for wholesale goods (e.g., raw materials) shows that inflation has become deflation (i.e., turned negative) over the past 2 months.

The Conference Board reported spending on motor vehicles and parts rose a huge 1.1% in December from November. Spending at gasoline stations fell 1.3% from the month prior due to further declines in oil prices. Nonstore retail sales rose a very large 1.5% from the month prior while spending at department store rose 3.0%, which tells us how much brick-and-mortar retail sales have declined.

I reported earlier consumer confidence had also improved, another indication that consumers don’t see a danger ahead for their pocketbooks. The Conference Board’s confidence index was up 10 points in December.

“December’s increase in consumer confidence reflected more positive ratings of current business conditions and job availability, as well as less pessimistic views of business, labor market, and personal income prospects over the next six months,” said Dana Peterson, Chief Economist at The Conference Board.

AtlantaFed

And we now have the Atlanta Fed’s GDPNow model bumping up Q4 GDP growth to 2.4 percent once more, from 2.2 percent due to “fourth-quarter real personal consumption expenditures growth and fourth-quarter real gross private domestic investment growth.”

This shows how much consumer spending and retail sales are driving economic growth.

The Federal Reserve’s survey of anecdotal evidence for November, known as the Beige Book, said the economy has softened since the previous report at the end of summer, which covers the period of Oct. 6 to Nov. 17.

This could mean the odds have improved for the Fed to begin to drop interest rates sooner, maybe in the spring. Wouldn’t consumers like that!

Harlan Green © 2023

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen