KEY DATA: Sales: +0.2%; Control: +0.6%/ Imports: -1.1%; Nonfuel: -0.2%; Exports: -0.8%; -1.1%
IN A NUTSHELL: “Atlas had nothing on the U.S. consumer, who continues to shoulder all the burden of growth in the country.”
WHAT IT MEANS: The markets are continuing on their merry wild mouse ride and investors continue to worry about oil and assorted international concerns. Meanwhile, back at the ranch, consumers are spending money as if nothing is wrong at all. On the surface, the January retail sales numbers don’t look particularly strong, but as usual, the details tell the real story. First, these data are not adjusted for price changes, so the declines in things such as gasoline enter as a negative. But gasoline prices fell more than sales, so its clear demand rose. The snow and cold weather led to strong demand for winter products and we ate in a lot as a result. Households started buying electronics again as well as general merchandise, so the rise in demand was fairly widespread. But maybe the best number was the so-called “control” group, which closely mirrors the consumption number in GDP and excludes gasoline, vehicles, building materials and food services, which rose strongly. We have started of the year with solid consumption of goods and with the weather turning cold, services demand could surge (utilities are part of the services number). And with consumer sentiment not getting crushed by the fall in stock prices, don’t be surprised if the solid household spending continues.
As for inflation, it still is being restrained by declines in import prices. Yes, energy costs are going down and where they go from here is anyone’s guess. The real issue is nonfuel costs. The January numbers were much less clear about the path of those goods. Imported food prices products jumped. While nonelectric capital goods costs were off, electrical equipment and non-vehicle transportation prices rose. Motor vehicles were up as were durable consumer goods. The details don’t say that all consumer imported goods prices are falling. As for exports, the farm sector continues to be hit by huge price declines.
MARKETS AND FED POLICY IMPLICATIONS: Janet Yellen testified in front of Congress this week and refused to bail out the stock markets. That, of course, set off a whole slew of market guru and big-investor invectives. They want the Fed to continue feeding the beast, as it did for years with quantitative easing. But the Fed wasn’t created to focus strictly on the markets: It’s U.S. economic growth that is job 1A. Today’s retail sales numbers don’t point to a recession coming any time soon. And the modest decline in the University of Michigan’s sentiment index also says that the average household has largely divorced itself from the markets. Why that surprises anyone is anyone’s guess. People have learned their lessons and appear to be looking long term. I cannot understand all the attacks on the Fed for raising rates only 25 basis points. Indeed, what kind of company would be crushed if the funds rate rose just one percentage point? Yes, there are growing risks, but their path is unclear. Anyone know where oil will be at the end of the year? If you do, tell me because I would like to by a beachfront home and retire. Basically, today’s retail sales numbers and the less than feared import price declines give the Fed some breathing room. Whether investors are buoyed by those reports, though, is anyone’s guess.