Consumer Confidence - Strong Redfin Sales Report

The Redfin report showed year over year same-store sales growth for the week of November 3rd was 6.1%. That beat the previous week’s growth of 5.9%.

This is the strongest growth rate since the beginning of October. It signals the holiday shopping season is about to be fantastic. Month to date sales compared to the previous month were up 0.1%.

Same-store sales growth is the strongest in over 10 years which means retail sales excluding gas and autos will be strong. Oil prices have been declining. Therefore gas sales will weaken headline retail sales growth on a sequential basis.

Hopefully, consumers spend their gas savings elsewhere.

Consumer Confidence - Cycle High

The chart below explains why we should expect a strong holiday shopping season.

As you can see, the 13 week moving average of consumer sentiment just hit the highest point since the last recession. It’s interesting to see that consumers are very optimistic in the face of a volatile stock market.

Consumers are loving the near full labor market. And the acceleration in wage growth which are being combined with low inflation. The good news is the weakness in housing price growth should help housing become more affordable without causing homeowners to panic.

The biggest potential negative catalyst the consumer will face is rising prices because of tariffs. Businesses paying higher tariffs will hurt the economy. However, consumers are more important politically.

When consumers start paying these taxes, they may have negative feelings for the Trump administration. Which could then catalyze a trade deal.

Temporary dismay from businesses isn’t a big deal, but making voters angry is a problem. I’m operating under the assumption that no deal is made by the January 1st, 2019 deadline. That's when tax rates will increase from 10% to 25%.

The pressure for both sides to fold should be immense as that deadline approaches. Personally, I think a deal will be struck in Q1 2019.

Consumer Confidence - Consumers Have Low Debt

Real consumption growth of 4% saved the Q3 GDP report from showing sharp deceleration. Business investment growth was only 0.8%. I calculated the average GDP contribution from personal consumption expenditures from Q2 2016 to Q2 2018.

The average positive impact was 1.79%. Since Q3 was helped by 2.69%, it was helped by 0.9% above average. If consumption growth was average, GDP growth would have been 2.6%. Which would have been a disaster following 4.2% growth.

To be clear, 2.6% growth is near the cycle average. However, it would have been terrible for the stock market which sold off about 10% on 3.5% growth. The fears of a slowdown would have been vindicated. Even though growth is still strong in most reports, investors are still wary.

The most interesting part of this business cycle is consumers have deleveraged.

Even though the cycle is about to be the longest since the 1800s, the consumer is showing no signs of being overly indebted. Usually, rising rates, inflation, and too much debt catalyze recessions.

As you can see from the chart below, the household debt to disposable income ratio has fallen from about 135% to 100%. However, just because there is an increasing linear trend line which lasts several decades, doesn’t mean indebtedness should continue to increase.

At a certain point, it’s impossible for debt to increase further in relation to disposable income.

Consumer Confidence - Current Economy Nothing Like 2005

The debt to disposable income ratio is in the same situation as the saving rate. Up until the end of the previous cycle, the savings rate was in a downtrend.

If that downtrend would have continued, the savings rate would trough at close to 1% this cycle. There probably will never be a sustained negative savings rate.

That partially explains why the savings rate has been elevated this cycle. The current savings rate is 6.2%. The lowest rate in the past 8 years was 5.8% in February 2013. The cycle low was 4.9% in August 2009. But that was when consumers were starting to deleverage and save more.

The previous cycle troughed at the all-time low of 2.2% in July 2005. That was a huge red flag.

Record high leverage, low savings, and overvalued houses being given to borrowers who couldn’t afford to repay the loan meant a disaster was waiting to happen.

When you compare those negative catalysts to a trade war that will likely end amicably, a modestly hawkish Fed, and the end of the fiscal stimulus, the economy doesn’t look nearly as bad.

Consumer Confidence - Increasing Wage Growth

The economy could be like 2005 in the sense that a recession is coming in about 2 years. But the scenario is much less ominous.

Let’s continue with the discussion on the positive tailwinds the consumers are benefiting from. Let's look at both the quit rate and the NFIB survey. It shows labor quality is the biggest problem, pushed ahead by a year. These imply ECI private wages and salaries growth will accelerate in the next year.

That makes sense because the prime age labor participation rate is near the 1990 and 2007 peak. Also, the underemployment rate is low.

Generally, consumers get nervous when stocks fall because jobless claims are highly correlated with the stock market. They are worried about the job market not the stock market.

The S&P 500 just happens to be correlated with jobless claims. I don’t think a weakening stock market can bring down the consumer on its own when the labor market is strong, inflation is low, and consumers aren’t heavily indebted.

Personally, I don’t think consumers have any knowledge of the potential effects of tariffs. Even though they are discussed on the financial news a lot. I feel this way because tariffs haven’t been a major factor for years.

A trade war is a new concept for most people.

Consumer Confidence - Conclusion

Redfin same-store sales growth is strong which is consistent with strong consumer confidence and wage growth.

However, the Redfin data is far from a guarantee retail sales growth excluding gas and autos will be strong. Next retail sales report comes out on November 15th. Expectations for the October report aren’t out yet.

This will give us an early look at how strong Q4 GDP growth will be. Personal consumption growth drove Q3 GDP growth by 2.69%.