Generally speaking, analysts blamed the Delta variant for the recent deterioration in consumer sentiment and accompanying deceleration in retail sales.
There’s doubtlessly some truth to that narrative. Sentiment among Americans towards the vaccine push is waning and caseloads have surged. The healthcare system is under strain in hotspots and when the nightly news isn’t live-streaming the chaos at Hamid Karzai, anchors regale the public with the latest dire soundbites from hospital workers and public health officials in Texas, Florida and other states where the variant is spreading mostly unchecked.
But the problem with trying to gauge the impact of Delta on consumption is that it’s difficult to quantify and even harder to project into the future. A simpler explanation for weakness in consumption might just be the payback narrative.
“There is an old adage that says never bet against the US consumer’s willingness to spend,” Morgan Stanley’s Mike Wilson said Monday, noting that Americans’ spendthrift reputation was “one of the primary reasons we led the charge on recommending consumer cyclicals back in April 2020 at the depths of the COVID recession.”
As Wilson went on to say, the consumer didn’t disappoint. In fact, retail sales long ago recovered pre-pandemic levels (figure below), helped along by stimulus checks.
The disconnect with personal income (red arrow) raises questions going forward. Yes, more fiscal stimulus is now a guarantee. And the revamped child tax credit may support spending at the margins. But that could be offset by the expiration of pandemic unemployment programs (for example).
Morgan downgraded consumer discretionary in April on the assumption that some giveback is inevitable. “From our analysis it appears as if there wasn’t much of a recession at all when looking at real personal consumption over the last 18 months [and] it’s the same story when looking at nominal retail sales, which tells us we should expect a reversion to trend now that the stimulus is behind us,” Wilson said Monday.
Amazon may be a harbinger. The shares have fallen markedly since peaking early last month, quite possibly burning a number of hedge funds in the process.
Wilson tapped into that story to help make his point.
“With [Amazon] suggesting there will be payback on demand, this seems like a pretty good leading indicator of what to expect for consumer discretionary more broadly,” he said.
Even if investment is robust going forward, the US economy lives and dies by consumption. If spending doesn’t hold up, neither will the most optimistic economic forecasts.
There was nothing particularly groundbreaking in Wilson’s latest and, I imagine, he’d say that’s precisely the point. There were no medical musings in Mike’s Monday missive. No predictions about the evolution of any virus variants. Instead, Wilson said that although “most blame Delta” for disappointing retail sales and consumer sentiment, “we think this is more about a payback in demand.”
He expressed some surprise that consensus seemed to brush aside the collapse in University of Michigan sentiment, and while Morgan Stanley has been very constructive pretty much across the board over the course of the rebound and recovery, Wilson’s “mid-cycle transition” thesis might fairly be described as cautious — at least in the near-term.
“We think the degree of [consumer discretionary] underperformance is likely to get worse as we lap difficult comps, the supplemental unemployment benefits come to an end, and higher prices lead to demand destruction,” he said Monday.
Sometimes, there’s elegance in simplicity.
