US retail sales fell by the most since December of 2021 last month, data out Thursday showed.
The 0.6% decline was three times larger than the expected drop (figure below). The range of estimates, from nearly six-dozen economists who, assuming an average professional career of one decade, boasted a combined 700 years of forecasting experience, was -1.1% to +1.1%.
November’s decline came on the heels of a 1.3% increase in October. The data isn’t adjusted for inflation which, I’m told, is elevated.
The ex-autos print, -0.2%, counted as a big miss. Consensus expected a 0.2% increase. The control group fell by the same amount against an anticipated 0.1% gain. Revisions were negative.
Ostensibly, the downside surprise suggests spending is starting to crack — that incorrigible American spendthrifts are finally acquiescing to the Fed’s implicit demands. If that’s the case, you could argue for a “bad news is good news” interpretation, although the Fed’s determination to get rates above 5% (and stated desire to hold them there through 2023) throws a bit of cold water on that spin, assuming you believe policymakers have the fortitude to follow through on their hawkish ambitions.
By now, you know the narrative: Savings buffers are dwindling, but that’s relative to a huge pile of accumulated cash still sitting in the accounts of many Americans (the bottom 20% of the income distribution isn’t so lucky). Revolving credit balances are rising faster than inflation (figure below), but there’s still plenty of headroom on credit cards. Ever higher rates will eventually squeeze households sitting on variable rate debt. The savings rate is near a record low. And so on.
Just four of 13 retail sales categories posted gains in November compared to 10 in October and 10 in November of 2021. Sales at non-store retailers dropped 0.9%. The building materials and supplies dealers category saw a 2.5% drop, while department stores and furniture outlets both saw declines approaching 3%.
“On net, this is a print that will begin the conversations about a struggling consumer as the lagged impact of tightening becomes evident in the data,” BMO’s Ian Lyngen remarked on Thursday morning.
And yet, the labor market is resilient. Jobless claims — which are back in focus for obvious reasons — printed well below estimates, and continuing claims were slightly below forecasts as well. All torturous attempts to make the numbers say “recession” aside, the jobs data just isn’t cooperating. Not yet, anyway.
Meanwhile, the Empire and Philly Fed surveys were noisy. The former printed -11.2 (a miss, and well below last month’s headline) while the latter came in below forecasts too, but rose from November. The Empire prices paid gauge was unchanged, but the Philly survey prices index fell markedly.
All in all, Thursday’s US data was mixed, but the focus will invariably be on the retail sales miss which, again, you can interpret as “bad” news of the “good” variety if you think the Fed will blink early next year, or just plain old bad news if you suspect Jerome Powell intends to get to terminal and stay there come hell or high recession.
perhaps the combination of upside surprise in job stats and disappointing retail could be interpreted by the fed as tight labor conditions causing inflation which is so high that its starting to bite in consumption. we are faced with a deteriorating economy and more determined fed.
Jerome Powell will be the only person in the world surprised by the precipitous rate at which employers start shedding service industry jobs in Q1. He might as well get it over with and go back go to being dual-mandate-Jerome before he gets kicked out of his country club.
The unemployment rate is now 3.7%. The FOMC’s SEP projections have UE at 4.4% to 4.7% by the end of 2023 and 4.3% to 4.8% in 2024. One percentage point in UE is about 1.6MM jobs, if the labor force is constant, and the Fed does not see labor participation increasing. Thus FOMC is expecting up to 1.6MM net job losses during 2023 and no net job recovery during 2024.
FOMC projects core PCE not reaching 2.0% until 2024. It is not inclined to move the goal posts to 3%. The Fed knows that goods inflation is falling and housing inflation will fall in 2023. It believes that the remaining 55% of the inflation index is driven by rising wages in an imbalanced labor market, so it intends to force the labor market back into “balance”.
Powell won’t say out loud that a “balanced” labor market means 1MM+ net job losses in the next couple-few quarters, but given the SEP projections and not seeing growth in the labor force, we can figure out the Fed’s unsaid expectations. No doubt FOMC hopes the rebalancing can be bloodless, but they won’t be counting on it.
When we start seeing net job loss of -100K/month, pundits will rush to predicting a quick Fed pivot to easing, partly due to recency effects and partly because that’s the bullish scenario. Meanwhile, Powell is telling you:
“I’ve made it clear that right now, the labor market’s very, very strong, near a 50-year low where you’re at or above maximum employment. In 50-year low in unemployment, vacancies are very high, wages, nominal wages are very high. So the labor market’s very, very strong. Where we’re missing is on the inflation side. And we’re missing by a lot on the inflation side. So that means we need to really focus on getting inflation under control, and that’s what we’ll do. I think, as the economy heals, the two goals come more into play. But right now, clearly, the focus has to be on getting inflation down.”
Transcript
https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20221214.pdf
SEP
https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20221214.htm
Some macro commentators are projecting net job losses starting in 2Q23 and asserting the Fed is driving by “looking in the rearview mirror”, intimating that the Fed will be surprised by job losses and swerve to easing.
Suppose instead that the Fed is looking “through the windshield”, sees the net job losses coming, and intends to plow straight over the bodies to its 2% destination?
On Monday the FRB of Philadelphia revised downwards estimated payroll jobs added in the US 2Q from 1,112,500 to 10,500. Maybe less “very very strong” than some think.
Those credit card numbers look bad. We are going to start hearing a lot more about high credit card balances/interest rates over the next few months in the media in early 2023 after the holiday spending season is over.
I like your take, I just wonder how well those jobs that were added in October and November will stick. Looks like a lot of leisure and hospitality hiring and delivery drivers. That’s like a half million private sector service jobs in the last two months, according to ADP. Seems expandable in light of the grim retail number this morning. What if there was a big negative number in Q1?
“What if there was a big negative number in Q1?” Perhaps, nothing. Maybe Powell and the FOMC would grimly nod and get back to fighting inflation.