The recent data releases continue to suggest moderately strong economic growth in the near term and little threat of higher inflation. However, investors remain anxious about a wide range of issues. In contrast, in his discussion last week, Fed Chairman Powell appeared confident that the economy is in good shape and can handle further rate increases.
Retail sale rose more than expected in October, but that news was accompanied by downward revisions to the two previous months. Sales were unusually strong in the spring and early summer, leading a bit of a lull in August and September. The underlying trend appears moderate. Job gains and rising wages should provide support in the holiday shopping season. We should see a continuation of the trends of recent years. That is, consumers are generally conditioned to buy stuff on sale. We should also see a further shift toward online sales (amplified by the demise of Toys R Us), partly at the expense of traditional department stores.
Early 2019 may be a bigger challenge for the consumer spending outlook. Bear in mind that there is further fiscal stimulus in the pipeline. Expansionary economic policy is, well, expansionary – and the federal budget deficit is projected to widen significantly further next year (with most of the boost showing up in the first half of the year). On the other hand, trade tensions, which have had little impact on the aggregate economy so far, are set to ramp up. The 10% tariff on $200 billion in Chinese goods (industrial inputs, capital equipment, and some consumer goods) is set to rise to 25% in 2019 and President Trump has threatened to impose tariffs on an additional $267 billion in Chinese goods (mostly consumer goods). This could be avoided if we reach a trade agreement with China, but it’s unclear as to which of the opposing factions within the White House will prevail. January and February are not critical months for retailers, but a broadening of tariffs would boost consumer prices into the important spring selling season.