Ahead of this Friday’s retail sales report, which bulls are hoping will show a continuation of the strong spending trends revealed in last month’s data, Bank of America is once again the bearer of bad news.
As BofA reports in a note released this morning, according to the bank’s internal aggregated credit and debit card data, consumer spending slowed in July, with retail sales ex-autos down 0.3% mom on a seasonally adjusted basis. This follows the flat pace in June for retail sales ex-autos. As chief economist Michelle Meyer points out, “we think the recent weakening in consumer spending is largely a cooling down after the exceptionally strong gains from March through May (Chart 1).
Looking at the full year, BofA finds that retail sales ex-autos are only up 0.7% yoy, and points out that Census Bureau data have closely followed the trend in the BAC data, suggesting that the market should prepare for either a downward revision to the June data and/or disappointing July figures: “In our view, this sets up for a softer Census Bureau retail sales report on Friday – we would not be surprised to see either disappointing July sales and/or a downward revision to June.“
It’s not all bad news: based on the BAC card data, BofA found that spending on staples slowed over the course of last year with a slight recovery this year.
- The S&P consumer staples index showed a similar slowing over last year, but a somewhat faster recovery than the card data.
- This is in contrast to the data on discretionary spending where the BAC aggregate showed continued strength – with a pickup in growth this year – while the S&P consumer discretionary index weakened
However, this appears to be offset by a notable slowdown in spending at restaurants and bars. Based on the BAC aggregated card data, spending at restaurants and bars is increasing at a roughly 5% yoy pace, down from the recent peak in early 2015. The BAC data has been consistent with the trends in the Census data. It also adds:
- This strength contrasts with the views of BofA Merill Lynch restaurant analyst, Joe Buckley, who has expressed concern about weakening sales. Joe and team reference the Knapp-Track casual dining same store sales figures which have been decelerating, showing weaker sales and guest counts.
- We suspect that the BAC card data is receiving a boost from a shift toward greater spending on cards at the expense of cash.
Digging deeper into the BAC composite shows that there has been relative strength in card spending at bars and caterers. However, combined, this only makes up a tiny 3.5% of the aggregate. BAC card spending on fast food has seen a secular slowing since the recession hit and is now growing at a slower pace than eat-in restaurants. It seems that there has been some shift away from “fast food” options. This is consistent with the theories that consumers are prioritizing healthy eating, emphasizing natural and organic food.
What is more troubling is that for the past 3 years, “waiters and bartenders” has been one of the fastest growing job categories within the US labor market. If the slowdown in end demand continues, it is only a matter of time before hiring in the affected industry likewise slows down if not outright reverses.
Finally, and most disturbing, is the dramatic slowdown in spending on home improvement and home goods: traditionally the most visible concurrent and slightly lagging indicator to the US housing sector.
As BofA notes here, “we are seeing a continuation of the theme that we flagged in last months’ report – sales at home improvement and home goods stores are weakening based on the BAC card data. After a brief gain last month, sales at home improvement stores tumbled in July, leaving sales down 3.4% yoy. Sales at home goods stores continue to weaken as the yoy rate reached a new cyclical low in July. We see a similar weak trend with sales at furniture stores.”
Needless to say, if confirmed by the Department of Commerce, this will be the most direct indicator that the US housing recovery has stalled.
Which brings us to this Friday’s jobs report: if BofA’s internal credit card data is indicative of overall spending trends, then we are about to see a very disappointing retail spending report. On the other hand, it will be difficult to square such disappointment with the recent GDP data which shows that only the “strong” consumer is keeping the US economy out of recession…
… not to mention the past two months of very strong jobs data. As such, we eagerly look forward to seeing just how much of an outlier this Friday’s seasonal adjustment factor will be to keep the recovery narrative going. it won’t be the first time seasonals have come to the last minute rescue as we showed back in February, when the adjusted print was more than double the actual number.
Alternatively, if the government does report the unvarnished truth, beware the whiplash move in the dollar and Treasury yields, both of which would promptly tumble as any hopes of a December, and certainly September (and perhaps 2017 as well) rate hike is quickly and permanently extinguished.
via http://ift.tt/2bgsKUl Tyler Durden