American Shoppers Just Can’t Pass Up A Bargain And Department Stores Pay The Price #GotBitcoin

Revenge spending, stimulus checks, Social Security payments — it all made for a huge 17.5% surge in department store sales last month, something the ailing sector will welcome. American Shoppers Just Can’t Pass Up A Bargain And Department Stores Pay The Price #GotBitcoin

Revenge spending did not slow in January, and gave a boost to a long-ailing sector: department stores.

Emerging from a year that saw Macy’s Inc. and Nordstrom Inc. warn of disappointing holiday sales and Kohl’s Corp. shed jobs, the 17.5% jump in sales last month (handily beating the 1.3% gain for e-commerce) is a welcome surprise.

Department store sales growth has outpaced or kept up with e-commerce only a few times over the last decade. For example, in May 2020, stimulus-rich shoppers splurged at department stores, helping to grow sales at the same rate as e-commerce.

So What’s The Deal This Time?

The big increase can be partially explained by a slower — and elongated — shopping season last year. Retailers have been ramping up promotions since the summer, causing some fatigue that showed up in a softer-than-usual turnout over the Black Friday weekend, typically the beginning of the holiday season.

That pace dragged on through December as some consumers held off until discounts became steeper toward the end of the month. Many of those bargains bled into January, which could have motivated more people to come out and make purchases they had put off till they had a better view of their budgets.

Then there’s luxury shopping, where spending has continued unabated as the pandemic recovery cleaves a deeper wedge between the rich and pretty much everyone else.

The Commerce Department doesn’t break out department store categories so it’s hard to compare, but luxury companies have had a strong year and continued to discount through January as they tried to clear out inventories before the beginning of the new fiscal year.

For instance, Bloomingdale’s had a clearance sale where items were up to 70% off with an additional 50% off with a discount code. Saks Fifth Avenue’s New Year’s Day sale discounted designer brands by 60%. Even the rich can’t pass up a deal, and a $1,500 designer bag is still $1,500 more spent in-store, whether it’s down from $3,000 or not.

But perhaps the simplest explanation is our eagerness to go out and shop in-person again after two years indoors. With wage and jobs growth still strong and inflation slightly lower, people have money in their pockets.

And department stores may be getting better at figuring out how to capitalize on every visit, even if it’s to return a present. With the right marketing, shoppers making a return could be enticed to buy a sweater on the way out.

That’s especially true when more than 50 million people receiving Social Security payments got an inflation bump, starting January. The adjustment amounted to an extra $7.3 billion last month, or almost $90 billion annualized, my Bloomberg Opinion colleague Conor Sen pointed out recently.

Department stores may have benefited from that spending, according to National Retail Federation Chief Economist Jack Kleinhenz.

While it’s totally reasonable to be optimistic based on these retail figures, department stores and overall retail spending may not shake out to be totally positive this year. Kohl’s continues to struggle with a weakening balance sheet and fading traffic, while Macy’s and Nordstrom continue to close stores.

The Federal Reserve’s interest rate hikes are still working their way through the economy so consumer spending may slow down later in the year. Still, department stores are no longer bleeding as badly as they did during the pandemic, and certainly before. There might be a silver lining for stuffy old department stores after all.

Consumers Are Letting The Good Times Roll Again

Spending hasn’t hit trends like this since before Lehman imploded. And that will shake up the Fed’s inflation/rates calculations about a ‘no landing.’

Never Underestimate The American Consumer

Another day, another item of evidence that the US economy isn’t slowing down anything like as much as many had thought. US retail sales in January rose the most in almost two years, reinforcing the narrative that consumer demand remains strong.

This is despite fears from Wall Street pundits that cash in the system is waning as money doled out for the two-year pandemic stimulus dries up. Consumers’ appetite to keep buying may bolster the Federal Reserve’s resolve to maintain its aggressive monetary tightening campaign

It is hard to explain the positive figures away. All 13 retail categories showed growth both on a month-on-month and a year-on-year basis. They’re led by motor vehicles, furniture and restaurants, which should all benefit from post-pandemic reopening.

Sales at restaurants and bars — the only service-sector category in the report — increased 7.2% in January to the most since March 2021, suggesting that the rotation from goods to services continues in full force. (Given the difficulty reserving a restaurant in Manhattan over the last few weeks, this isn’t surprising.)

The 3.0% total retail sales growth for the month matched the highest estimate in a Bloomberg survey of economists, which had a median forecast of 2%. Further evidence that the economy was hotter than thought helped bond yields to rise, but the stock market remained largely impervious, with the S&P 500 registering a slight rise.

The main takeaway? That consumers are off to a good start in 2023 despite various pundits calling for a tough year for the US economy. Appetite to spend, it seems, remain solidly intact. Here’s Eliza Winger, economist at Bloomberg Economics:

With the disinflation process stalling and the economy showing only limited signs of softening, the strong retail-sales data suggest the Fed will need to keep rates high for longer — with a growing risk of a higher peak fed funds rate.

The report came on the heels of a slightly hotter-than-forecast inflation print, adding to the evidence that the Fed’s rate-hiking efforts have not had their intended effects just yet. For Barclays economists including Jonathan Millar, the recent data amplifies risks that the target range for the funds rate could surpass its current assumption of a 5.25% to 5.50% peak after the June meeting.

Traders continue to see about a 50-50 chance of a quarter-point rate hike in June (not not long ago, there were hopes that this month’s hike would be the last) and expect interest rates to peak around 5.3% in July.

Or, to use the latest analogy of choice, this contributes to a “no-landing” scenario, rather than the previous debate between soft and hard landings. Torsten Slok, chief US economist at Apollo Management, defines as follows:

There are more and more signs of the market pricing the no-landing scenario where the economy remains strong, and inflation remains sticky and persistent. Not only are short rates increasing, but one-year breakeven inflation expectations are rising and approaching 3%…

In other words, the market is saying that inflation will be significantly higher in a year’s time than the Fed’s 2% inflation target.

Put differently, instead of expecting a recession and lower inflation, short-term inflation expectations are rising and becoming unanchored.

In response to this, the Fed will have to be more hawkish to ensure that inflation expectations do not drift too far away from the FOMC’s 2% inflation target.

While the idea of not having to bring the plane in to land at all sounds positive at first blush, it isn’t. As Slok points out, it would mean higher rates that would endanger equities and the credit market. Is a “no landing” really possible?

Some Long-Term Context

Viewed in longer context, the numbers add grist to the notion that the pandemic at last jolted consumers out of a slump that had lasted ever since the Global Finance Crisis.

Viewed on a log scale, it’s clear that the dive in retail buying after that recession was never followed by a return to the prior trend. Now, that’s changed.

After the lockdown’s lurch downward, American retail sales are back roughly where they might have been expected to be by now when Lehman fell.

Evidently inflation has much to do with this. Higher prices will tend to increase the nominal value of retail sales. But if we look at retail sales in real terms (by dividing through by the Consumer Price Index), we find that the narrative of a jolt back above the depressed post-GFC trend remains intact, even if sales aren’t back above their momentum from before the crisis, shown in the upper dotted line:

If consumers really have returned to a pre-Lehman normal, this has much to do with their access to money. Over time, growth in the money supply tends to be closely correlated with consumer consumption. Money growth in the US, as measured by the Fed’s M2 aggregate, has been startlingly consistent.

The desperate efforts to print money in the crisis and its aftermath had little impact as all of it went toward allowing banks to recognize losses on the bad loans on their books. The pandemic stimulus went into people’s wallets, and even though money supply growth has actually been negative over the last 12 months, much of it still hasn’t been spent:

In the long term then, it’s possible to make the case that this is the end of the weird post-pandemic period, which can be called “the financial repression bubble” in the words of Longview Economics’ Chris Watling; in other words, a policy of forcing consumers to lend to the government at very low rates (known as financial repression) is now over, and it’s natural to see a snap back in retail sales. The return of inflation is another symptom of this.

Some Short-Term Context

If that is a reasonable long-term explanation, can the retail sales be explained just by some short-term quirks? Like other recent data, the numbers may be noisier than usual. Bank of America economists including Michael Gapen said part of their strength in January is payback for the seasonal distortions that weighed on the December data — distortions that had in fact been there since October:

To get a clean read on the trend in retail sales, we compare the January data to last September. Ex-auto and core control retail sales are up 4.6% and 2.6% respectively on a four-month annualized basis. Given that retail sales represent nominal spending, the data point to solid, but not surging, goods demand.

That caveat aside, why are people still spending? The firm’s economists blame it on the disposable income that likely surged in January due to robust job growth and inflation indexation of various components of income in the new year.

Stephen Stanley, chief US economist at Santander US Capital Markets, suggests that the seasonal adjustment was a key issue.

Consumers mostly did their Christmas shopping earlier in 2022. Expenditures were strong in September and October and softened in November and December on a seasonally adjusted basis, leading to “an element of smoke and mirrors behind the huge January rise in sales.”

Similarly, Barclays reminds investors these data are backward-looking and may still be revised downward:

But even if this is true, it requires careful interpretation … If January’s effects are providing too much of a boost, this likely means that the effects in November and December attributed too much of a seasonal penalty — implying that the “true” seasonally-adjusted retail sales series would show less weakening late last year.

As with several recent reports, some have been prompted to change their views, while others on Wall Street see the numbers as a mirage. We should only need to wait a few months to find out who is right. One recent trend, however, is very believeable.

Among all the breakdowns of the report, this chart highlighted by Will Compernolle, senior economist at FHN Financial, stood out.

It shows the widest-ever gap between spending for food and drink away from home compared to food and drink prepared at home. It could be that people are tired of their home-cooked meals or that they feel the ingredients needed to prepare their own dishes could cost as much as eating out.

Tricky to tell, but the trend upward is pretty clear. It also suggests that this could be a great time to open a restaurant — assuming that you can pay enough to recruit the staff. The opportunity is there. People have felt for years that they should get out more. Now at last they’re putting it into action.

Updated: 2-16-2023

The U.S. Consumer Bounces Back

The strong labor market, fading pandemic concerns and jump in Social Security benefits helped boost spending, and there could be more to come.

Retail sales came roaring back last month in the U.S. If anything, they probably understate the strength of the American consumer.

The Commerce Department on Wednesday reported that retail sales rose a seasonally adjusted 3% in January from a month earlier, after slipping 1.1% in December. Economists expected a slimmer, 1.9%, gain.

There was strength across the board, with all of the retail categories within the report experiencing gains.

There are several likely factors behind the strength in sales. The first is the job market: With the Labor Department reporting that the economy added a seasonally adjusted 517,000 jobs last month, and that the unemployment rate fell to its lowest level in more than 50 years, more people are drawing paychecks.

Despite all of the recent layoff headlines, they aren’t worrying much about getting fired, either, with the Federal Reserve Bank of New York’s monthly survey of consumers still showing that people continue to put low probabilities on the possibility of losing their job.

Another Factor: Social Security checks were 8.7% bigger last month, as last year’s jump in inflation led the Social Security Administration to put through its largest cost-of-living adjustment in four decades. That means that roughly 70 million people suddenly had more money coming in the door.

Then there is the pandemic. Unlike last year, the U.S. wasn’t beset by a big Covid-19 wave in January. To the contrary, there were fewer recorded cases last month than in December. As a result, people continued to re-engage in activities such as in-person shopping, heading into the office, and travel.

Month-to-month retail-sales growth isn’t benchmarked to last year’s pandemic January, but the drop in cases and contrast in mood certainly could have had a psychological effect on spending. The category that saw the biggest gains in Wednesday’s report was food services and drinking places, where sales rose by 7.2% from December.

That is notable because it is the only services category within the report, and Americans spend more on services than they do on goods. If restaurants were busier, maybe nail salons and hotels and dentists were, too.

All of this—the job market’s strength, the increase in benefits, the fading of pandemic worries—suggests that spending could be robust in the months ahead.

The Fed is raising interest rates, and the more it raises them the more likely it is that spending will slow down, and the greater the risk that the U.S. will slide into a recession. But if a downturn is coming in 2023, it sure doesn’t look like it has started yet.

American Shoppers Just Can’t Pass Up A Bargain And Department Stores Pay The Price #GotBitcoin

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