Retail Sales Disappoint
This morning data from the U.S. Census Bureau data on retail sales delivered yet another surprise to the downside, as has been the consistent trend now for weeks. Sales in May saw their biggest drop since January 2016, falling 0.3 percent versus expectations for a 0.1 percent increase. On a year-over-year basis, sales (excluding food services) rose 4 percent, but the trend is showing signs of rolling over demand.
The weaker than expected consumer spending, which is roughly responsible for two-thirds of the U.S. economy, may get the attention of the Federal Reserve, whose officials have been trying to convince us that the first quarter weakness was merely transitory. It appears that transitory has gotten stuck in some economic mud.
Looking into the details of the retail sales report, no one should be surprised that auto sales fell 0.2 percent and department store sales dropped 1 percent, the largest decline since July 2016. On the other hand, online retailers enjoyed a 0.8 percent increase in sales after a 0.9 percent gain in April as our Connected Society theme continues to strengthen. We’ve spoken a lot here at Tematica about the pain felt in the restaurant sector, which was again reflected in a 0.1 percent drop in sales for them in May.
This is consistent with yesterday’s ZEW Economic Survey which showed that while the Current Situation and Growth Expectation indicators for the Eurozone as a whole, as well as Italy, Germany and France, are rising, the U.S. has rolled over and rolled over hard as the chart below illustrates.
Bottom Line
We’ve likely seen peak housing, auto, consumer sentiment, inflation and real interest rates while unemployment has bottomed. We have a Federal Reserve in a Fed funds rate hike cycle with an eye on shrinking the Fed’s balance sheet, the size of which has been highly correlated with aggregate stock prices. While the S&P 500 normally experiences about 50 days with a +/- 1 percent move, so far this year we’ve seen all of 5 such days. If we see mean reversion for the rest of the year on top of the economic trends and Fed focus on tightening… Hold onto your hats!
