Upper Income Households Have The 3rd Most Confidence In 20 Years

December Redbook Shows Continued Strength

We’ve already had a strong Black Friday and Cyber Monday, but that’s not the entire holiday shopping season. The rest of December is also important. Last year, we saw a huge dip in retail sales growth in December. There was an extra week for shopping. But consumers didn’t utilize that time to spend more because stocks were crashing. 

The trade war and the coming government shutdown also created uncertainty. This time there’s 6 less shopping days, but that doesn’t mean we won’t see strong total growth. There is very strong real wage growth and the labor market is fuller than last year. Plus, stocks are exploding higher and there’s no fear of a government shutdown. 

Redbook same-store sales growth reading in the week of December 7th fell from 7.9% to 5%. That’s a solid growth rate. It’s not surprising growth fell after the amazing rate in the last week of November. That growth may have been caused by the timing of Thanksgiving. However, you’d expect a greater growth decline in the weeks preceding or following it since they would need to compete with more important days (Black Friday) last year.

Very Strong Preliminary Consumer Sentiment

University of Michigan preliminary December consumer sentiment report showed greater strength than the Redbook weekly report. This sentiment index increased sequentially. It’s no surprise that with great real wage growth and a high prime-age labor force participation rate consumers are confident. The run in this index in the past 3 years has been the best since the late 1990s. 

Specifically, the 3-year average is 97 which is the highest plateau since the Clinton administration. 2 periods where Presidents were getting impeached/potentially being impeached were the best times for consumer sentiment. Personally, I don’t see this as having a causal effect. It’s happenstance. However, it shows that impeachment isn’t an issue for consumers.

Overall December consumer sentiment index rose from 96.8 to 99.2. That’s 0.9% yearly growth. That growth rate is solid because the index is so high. It’s like if you rated a cake a 9 out of 10 and the baker baked a new one to improve, there’s not much room to get better. 

The current index was up from 111.6 to 115.2 and the expectations index was up from 87.3 to 88.9. This is different from recent reports which had the expectations index improving at a faster clip sequentially. Gains in December sentiment were mostly from upper-income households who had record gains in wealth because of the rise in stocks. Those with incomes in the top third had their third-best assessment of their personal finances in 20 years. Their confidence was helped by record-low long term inflation expectations.

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As you can see from the chart above, confidence among Republicans rose sharply, while confidence among Democrats fell modestly. Consumers over 55 are much more confident than those under 35. That’s probably a combination of wealth and politics. 

Those in the top third of incomes had strong confidence. People over 55 have more money in stocks, which have been rising than those under 35. Older people tend to be more conservative and younger people tend to be more liberal which explains how politics may have driven the divergence among the age groups.

Forgotten Fed Meeting

This is one of the least talked about Fed meetings is about 1.5 years. The meeting on Wednesday isn’t a hot topic because there is a 97.6% chance the Fed doesn’t change the Fed funds rate. Plus, there is a 91.4% chance it doesn’t change rates in January. 

Fed’s decision won’t be a big deal unless it cuts rates unexpectedly. Its guidance doesn’t even matter that much because there’s no chance of a cut in January. I don’t see why the Fed would want to guide for cuts in January. Especially considering the fact that the recent data from the consumer has been strong. Plus the Fed has stated it wants to wait and see how its rate cuts earlier this year impact the economy next year.

Fed wants to see how well it dealt with the slowdown. Even at the March meeting there is a 79.6% chance the Fed doesn’t hike or cut rates. Oxford Economics is calling for a cut, but I don’t see one happening unless the data gets much worse. I expect the data to get modestly better in the next 3 months. 

For all of 2020, the Fed funds futures market shows there is a 56.3% chance of a cut. Many have been calling for no cut in 2020 and one hike in 2021. Now, I don’t see a recession in the next 2 years. It’s possible the economic trajectory could change after the election. No one can predict the election, so I don’t include it in my expectations.

Productivity & Labor Cost Growth Fall

Q3 quarterly productivity growth was -0.2% which was below estimates for -0.1%. This was up from the original reading of -0.3%. However, as you can see from the chart below, this was the first negative growth reading in 4 years. Hours worked growth was revised higher from 2.4% to 2.5%. 

Unit labor cost quarterly growth was 2.5% in Q3 which was below estimates for 3.4%. This was way down from the initial reading of 3.6%. Productivity growth should be hurt by weak business investment in Q3 and Q4. We’ve seen wage growth fall slightly along with inflation, so this cost growth decline isn’t shocking. It’s good for firms which have been dealing with declining margins.

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Conclusion

Redbook same-store growth was solid in the first week of December. I think the consumer will finish up this holiday shopping season strongly. Consumers exhibited very high confidence in the University of Michigan report partially because of the rise in stocks. Fed won’t cut rates on Wednesday. Frankly, I don’t see any cuts in 2020 either. Productivity growth was weak in Q3 and unit labor cost growth was revised lower.