US retail sales remain underpinned by falling interest rates and resilient consumer purchasing power

Seasonally adjusted data released today from the Commerce Department showed that headline US retail sales rose 0.4% in the month of August, against 0.2% expected by economists surveyed by Bloomberg. Over a year ago, August retail sales look unspectacular with a 4.1% gain. However, much of the retail strength can be seen in non-store retailers (i.e. online), where sales were up 16.0% from a year ago in August, the fastest pace for 13 years.

Commenting on the data, Daniel Casali, Chief Investment Strategist at Smith & Williamson Investment Management, commented:

“Looking through the monthly volatility of the retail sales data, the combination of falling interest rates, led by the Federal reserve, and resilient consumer purchasing power are likely to sustain solid US retail sales growth. For instance, lower rates in the US has led to 6% annual growth in mortgage purchase application averaged over the last three months, typically a lead indicator for new home sales. This will have ripple effects; think of refurbishments and greater demand for the latest electronic gadgets as buyers move into new homes.”

“Aside from interest rates, retail sales are primarily supported by labour income from the combination of employment, hours worked and wages. In real terms, this labour income is reflected in aggregate private-sector wages, which grew 4.1% from a year ago in July, and is up from under 2% at the end of 2018.”
“Rising wealth provides another layer of support for the consumer. US household assets have been boosted by rising stock, bond and property prices, while liabilities have fallen to 97% of disposable income from a high of 134% in early 2008, the biggest deleveraging since the Second World War. Rising assets and falling liabilities has lifted US household net wealth to nearly seven times annual take-home disposable income, close to a record high.”

“Putting together all the available financial resources available to consumers from wealth gains, take-home pay (wages after tax is deducted) and consumer credit, we have calculated a measure of real consumer purchasing power. From our estimates, US real consumer purchasing power is running at an annual rate of 4.2%, higher than current personal consumption growth of 2.7%. Not only does this metric suggest that consumers have the financial wherewithal to maintain their rate of expenditure, it also points to upside in growth, provided shoppers remain confident enough to spend, rather than save.”

“In summary, while lower bond yields appear to project a sharp economic slowdown, falling interest rates and consumer purchasing power continue to support US retail sales. Looking forward, healthy consumption in the US is constructive for the global expansion and the ongoing rally in equities.”

Source: 13th September 2019, Thomson Reuters Datastream, Bloomberg, Smith & Williamson Investment Management LLP

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