Flattish Consumption

Retail sales disappointed in August with an increase almost entirely coming from cars’ sales. Excluding autos, sales were almost flat in volume. The increase in long-term rates could hamper spending on big-ticket items, and slow down further overall consumption. Prospects are still not positive enough for the Fed to reduce the support to the economy.

The August retail sales report confirm that there is no solid upward trend when it comes to the US GDP growth. For sure, things do not deteriorate, but they do not really improve either. At least, there is no acceleration.

Total retail sales were up 0.2% m/m, mainly thanks to solid cars’ sales (+0.9%). Excluding this item, sales were up by a limited 0.1%, i.e. likely more or less in line with retail price inflation, meaning that real sales (in volume) were probably flat.

Consumer spending began the year on a very dynamic trend taking into account the increase in fiscal pressures (the payroll tax rate was up 2 percentage points, and the income tax on the wealthiest was raised). Non-recurrent income at the end of last year, such as dividend and bonus payments made in advance of the tax increase, helped support income and spending. But since then, the pace of increase is back in line with the rate of growth in income.

As income primarily comes from wages, the sluggish growth rate in both job creations, hours worked, and hourly earnings leads to a sluggish rate of expansion in spending.

The fact that sales were supported by cars in August is actually a cause of concern, as those big-ticket items are financed through credit. With the recent rise in long-term interest rates, the willingness of US households to get indebted is likely to be refrained, and spending on durable goods could well relapse.

As long as conditions on the labour market do not markedly improve – which would mean a growing number of people holding a full-time job and getting decent wage increases – consumption cannot be the engine of growth. With business still waiting for a clearly outlook for demand before spending more on investment and the federal government cutting its deficit, only exports can be dynamic. To that matter, the end of the recession in the Eurozone is good news. But the turmoil in emerging markets is not. In short, the Fed has no reason not to keep on providing monetary accommodation.

BY Alexandra ESTIOT

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