A Mixed Bag, But Optimistic on the Consumer

Inflation-adjusted consumer spending growth, 70% of Gross Domestic Product, rose at a lackluster 1.8% annual rate in the advance estimate for 3Q14. That figure is likely to be revised higher, but the pace is expected to remain disappointing relative to job growth (this year, we are on track to post the largest increase in jobs since 2005). The main restraint on spending appears to be the weak trend in average wages. Until the job market tightens a lot more, we’re unlikely to see a significant pickup in wage growth. However, lower gasoline prices will add to consumer purchasing power in the near term.

Prior to the recession, motor vehicle sales were fueled partly by the extraction of home equity (which dried up during the downturn). Motor vehicle sales have improved gradually since the recession ended, reflecting a simple story: 1) Cars get old and have to be replaced, and 2) banks are willing to make auto loans (it’s a lot easier to repossess a car than a home). With the pace of vehicle sales now back to the pre-recession level, it’s unclear whether we’ll see that trend level out.

Core retail sales have risen at a moderate pace in recent months. The October retail sales report showed a modest upward revision to figures for August and September. Obviously, there’s a significant seasonal pattern in unadjusted sales, with a sharp spike in December. As a rough rule of thumb, the back-to-school season is a good predictor of holiday sales. This year’s back-to-school results were relatively lackluster.

Inflation-adjusted wage growth has been weak in recent months, but lower gasoline prices are adding to purchasing power. As noted previously, the impact on the consumer depends on how low gasoline prices go and how long they stay low, but it also arrives with a lag. While lower gasoline prices restrained the retail sales total for October, the added purchasing power should help to support inflation-adjusted spending in November and December. Yet, it’s important to remember that gasoline prices normally fall about 12% from May to December. This year, they’ve fallen a little over 20% since late June. So, the decline in gasoline prices is not as impressive as one might think. Moreover, lower gasoline prices may simply offset the impact of sluggish wage growth, leading to only moderate spending growth in the near term.

One area where we may be seeing an impact of lower gasoline prices is in consumer sentiment. Consumers don’t spend confidence. Spending is driven primarily by income, although wealth and the ability to borrow are also factors. Still, attitude measures are often a reflection of consumer fundamentals in general. Hence, this is still a positive story.

Gasoline futures are suggesting that there is more room for retail gasoline prices to fall and that they are likely to stay relatively low in the first half of 2015. That’s helpful for the consumer spending outlook. We still need to see a greater pickup in wage growth, but we should get there in the months ahead as the labor market continues to improve.

© Raymond James

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