U.S. Consumers Are Busting Out the Wallet
Last month we opined that the weak GDP figure for the month of March was most likely an anomaly caused by a variety of unique factors, and the most recent retail sales figures appear to bear that out. On Thursday the U.S. Commerce Department reported that American consumers spent 1.2% more in May than the previous month, and that is after the figures for April and March were revised higher.
As we suspected would be the case, the GDP figure for the first quarter of this year was also revised higher from an alarming drop of 0.7% to a mild decline of only 0.1%. That’s not great, but it’s also not bad given the unusual set of circumstances the U.S. economy had to overcome, including one of the coldest winters on record combined with a protracted dockworkers’ strike that closed down most of the major ports on the west coast for several weeks.
Of particular note in the most recent sales report was a larger than expect bump in auto sales – up 2% at dealerships – which is generally considered an indicator of consumer confidence. Even more impressive was the 8% improvement in auto sales over the same month last year, when the price of oil – and consequently, gasoline – was much higher than it is now.
Although most folks will splurge on small-ticket items such as restaurants and clothes when they have a few extra dollars in their pockets, few will commit to a large financial obligation such as an automobile purchase unless they believe they will continue to have the means necessary to support themselves. Usually that can be traced back to employment, which is also on the upswing.
Perhaps not at all coincidentally, the month of May also witnessed the highest ever rate of daily oil production by Saudi Arabia at 10.3 million bpd (barrels per day), keeping a lid on gasoline prices. And that does not appear to be a short term phenomenon; a senior official for Saudi Aramco was quoted as saying recently, “You are not going to see any cuts from Saudi Arabia” shortly after agreeing to supply buyers in India with more oil.
As if on cue, OPEC announced last week that it would not change its output targets for at least the next six months. If that holds true, then there is no reason to believe that American consumers would be likely to alter their buying habits so long as employment continues to improve. And with the unemployment rate now approaching 5%, it would not be surprising to see the labor force participation rate begin to rise, clearing the path for higher wage growth shortly thereafter.
At this point the only remaining piece of the economic puzzle not in place is an increase in wage growth, which thus far has been rising at an anemic pace of 1 – 2% annually, about the same as CPI. That may be the only thing holding the Fed back from implementing its publicly stated intent to begin raising interest rates in this country once the economy appears to be picking up steam. Quite frankly, I think most Americans wouldn’t mind letting the good times roll for a while longer after living in the shadow of despair for so many years as the Great Recession slowly oozed across the globe.
I can also think of a lot of people in Europe and elsewhere who wouldn’t mind having America’s “problem” to solve right now. While too much growth can lead to excess inflation – which is clearly something to be avoided in the long term – too little growth can lead to deflation, which can be disastrous in the near term. It may only be a matter of time until the ECB decides to cut Greece loose so that it can rid itself of perhaps the single largest impediment to Europe mimicking America’s return to economic vigor.
Regardless of what the Fed does or does not do, at the moment there is nothing in the way of financial data to suggest our economy is on the verge of collapsing. In fact, quite the opposite appears to be the case. If a recession is indeed on the horizon, then it is doing a masterful job of cloaking itself within a bevy of bountiful numbers.