The latest retail data says the American consumer is doing just fine.
I don’t buy it.
When I look underneath that headline number, I see households that are saving less, leaning harder on credit cards and finding increasingly creative ways to make major purchases fit inside a monthly budget.
One part of the retail report in particular is making consumers look a lot healthier than I think they really are.
And if the Fed takes that distorted signal at face value, it could make exactly the wrong move at exactly the wrong time…
In today’s Moneyball Economics, I’m going to show you the data point I think the Fed is misreading, why the consumer may be much closer to a breaking point than retail sales suggest, and why that sets us up for a much bumpier market heading into January.
Hit the video below to get started:
Video Transcript:
I’m Andrew Zatlin, welcome to Moneyball Economics.
A couple of weekends ago, I was up at West Point. My son’s a cadet there, and every year Columbus Day weekend is transformed into a family weekend at West Point. They stage a lot of activities and events. There’s a football game. This year, the highlight for me was going to the gym at West Point. I literally hit the weight room with my son at West Point. It just checks off a lot of boxes for me.
Along the way, I got to meet his teachers, met a lot of his friends, met the parents of his friends, and I would often be asked, “What do I do for a living?”
I would say I’m an economist, and invariably I would be met with silence and some head nodding because nobody knows what the job is of the economist. If I said I was a dog catcher, you’d probably have a pretty good understanding of what my day-to-day routine looks like.
But the economist, what do we do? I predict the future. I think I’m pretty good at it based on my rankings on Bloomberg. I have a pretty good handle on what’s going on in the world around us, where we’ve been and where we’re likely going. And to do that, I rely on data. That is a challenge sometimes because sometimes the data’s not reliable or sometimes there’s conflicting data. And so being able to tease out what the real story is is important.
It’s also important right now because there is conflicting data as to the health of the economy, and I believe that the Fed is misreading the data. And if I’m right, some interesting things are about to develop.
Why do I think I’m right and the Fed is wrong?
Well that has to do, for example, with a data point that came out last week, it’s every month we get a sense of where consumer spending is going based on retail data, based on a summary of what people are buying.
Retail data is pretty synonymous with consumer data at the high level. Well, the data came out really strong last week. It came out and said the consumer has been strong all year and getting stronger. This to me is important because it’s going to tell the Fed that if they raise interest rates, it’s not going to hurt the consumer. And the consumer is 70% pretty much of our economy. So very important that we know what’s going on with the consumer.
Well, guess what? I think the consumer is struggling.
Retail sales has been distorted as a data point. See, I look at more pure data, for example, to understand what’s going on with the consumer. I look at savings rate. Consumers are rating the piggy bank right now. Savings very low. Credit card spending, very high. That indicates to me that not only are consumers rating the piggy bank, they’re having to rely on their credit cards to get by each month.
This is not the side of a strong consumer. And it’s pretty much what I would expect given that inflation is out there. For example, in the retail data itself, consumers spent $10 billion more this year on gas than they did last year. That’s $10 billion that they wanted to either pocket or spend somewhere else. The retail data that looks strong, while I’m looking at actual spending looking weak, how can they be different?
They’re different because there’s a gimmick at play in the retail data that’s distorting the picture. It comes down to a major component of that retail number, auto sales. Now, you know that when you buy a car, it’s not a daily, weekly, monthly thing. It’s once every few years you buy a car, but that’s not how it actually plays out in the consumer economy. So you don’t put $50,000 down, you take out a loan and that loan translates into a monthly payment.
And that monthly payment matters because that’s what you can afford. Most people can’t afford to just write a check for $50,000, so they focus on the monthly payment. In fact, if you go into an auto showroom, that is typically the first question a salesperson will ask you, what’s your monthly budget?
And the reason that matters for us from the standpoint of understanding what’s happening with the consumers, this is the consumer income.
And if it’s getting squeezed by inflation interest rates, there’s less income to get by. They’re having to, again, dive into the piggy bank, save less or use credit cards. The way that they can afford a car given a limited pie is, again, goes back to the monthly. If you look at the lifetime of a loan for a car, it’s changed a lot. Pre – COVID, the typical auto loan was about five years.
Nowadays it’s six years. So you take that $50,000 car, it’s being spread out peanut butter style across a longer timeframe, which means far from auto sales going up and far from the consumer being able to afford everything. The consumer’s very constrained right now and they’re making ends meet not just by rating the piggy bank and using the credit card, but by stretching out auto payments.
In essence, the consumer is approaching a breaking point and the Fed isn’t seeing this and they’re going to raise rates again and that will lead to the consumer pulling back.
What happens next? Well, the pullback’s going to happen, I think, in about two or three months because I think everyone’s going to go through this holiday season and inflation’s still going to be up. They’re going to pull back, but there is a life preserver that’s going to be thrown out there and it’s going to come in the form of higher compensation.
So right now the consumer is being stretched thin, but companies’ corporate profits are at their highest in years. There’s a lot of money being made by the employers. They have yet to share it with the employees, and I think that is going to change. See, I think we’re now at a place where companies have to start hiring. They’re going to start paying more. We’re going to see some job hopping going on. We’re going to see, first of all, probably some pretty good bonuses this holiday season.
Employees are sick and tired of watching their employers make all this money while they struggle with higher gas prices. Then you’re going to see it take the form next year in a few months, higher raises. This is great. Consumer’s going to get through this. They’re going to get more money and the sense of a higher bonus is going to keep that spending going forward.
It’s going to be real money coming in the door that they can actually spend. But from the Fed and from the stock market perspective, this translates into wage inflation and that’s going to keep inflation up and that’s going to tempt the Fed to continue down this trajectory of raising interest rates. What I’m describing is an economy that’s going to be rocky for a few months and Fed moves could make it even rockier.
They could think they need to slow the economy down at a time when false data is saying the economy’s strong when in fact the consumer is weak. Decisions are coming up, protect yourself because we’re going to see a lot more volatility in the markets, especially come January.
We’re in it to win it, folks.
Zatlin out.
