Friday, November 27, 2015

Good news: Households are out there buying

Economics in a nutshell: "That households are out there buying despite minimal income gains is really good news."

Good news: Households are out there buying


INDICATOR: October Retail Sales and Real Earnings

KEY DATA: Sales: +0.4%; Excluding Vehicles: +0.2%/Real Hourly Earnings: +0.2%; Year-over-Year: +1.3% 

IN A NUTSHELL: “That households are out there buying despite minimal income gains is really good news.” 

WHAT IT MEANS: Our politicians were making a real mess of things during October but that didn’t stop consumers. Retail sales rose decently during the month even as gasoline purchases fell because of declining prices. Maybe people used the extra money to buy things because the details of the report were really good. Sales of vehicles, furniture, clothing, sporting goods, health care products, electronics and appliances were all up solidly. While we were shopping, we ate out a lot. Online shopping was only okay. People were probably waiting for the Black Friday sales, which showed up early in November. The only thing we didn’t do is fix up our houses. 

Can spending hold up? That is not clear. Real earnings, which are adjusted for inflation, rose moderately but only because inflation fell. Not adjusted for inflation, compensation went essentially nowhere. Over the year, consumer spending power has risen by less than two percent even though people were working longer. That does not bode well for long-term strong consumer spending gains. 

MARKETS AND FED POLICY IMPLICATIONS: It was nice to see that real people dismissed the ravings of the crazies in Washington. Think about it: The government was shut down, there were threats of a debt default and the ACA website crashed and burned yet spending rose. That says it all. Consumer confidence plummeted as a consequence of the disgust with Washington. But that was a reaction to political not economic factors and as the research has pointed out, it takes changes in confidence that are due to issues related to jobs and income to get any meaningful change in spending. And we know that the October jobs report was pretty decent. Thus, Main Street went about its business even if Washington didn’t. But the data on earnings is still quite troubling. Wages remain largely flat and that is not good for the average household. Nevertheless, the retail sales report holds out hope that the holiday shopping season will not be the disaster many fear. How will investors react to this? With outgoing Fed Chairman Bernanke making it clear that the labor market and economic growth are the deciding factors in Fed policy, those who believe that it is the Fed which is largely driving equities should remain hopeful. Indeed, with inflation decelerating, there is little pressure on the Fed to change policy.


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About this blog
Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm in Bucks County. He advises companies across the country on the risks and opportunities that economic developments may have on the organization’s operating environment. An accomplished public speaker, Joel’s humor and unique ability to make economics understandable have brought him a wide following. Reach Joel L. at .

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