Tomahawk, WI 10/18/2011 (PennyPayDay) – Last week the September Retail Sales data was released. The headline reading for sales showed a 1.1% improvement from the month before; the best monthly result since February. Sales are up almost eight percent on a year on year basis. Eight percent also happens to be the 12-month average annualized gain for sales; the highest mark since 2000. These numbers would seem to suggest that the consumer is back, free of the recessionary hair shirt and spending freely. On the same day of the retail report the University of Michigan Survey of Consumers reported that sentiment had fallen in early October, continuing a recent trend. The headline index fell a couple of points to 57.5 and is now just two points or so above the lowest levels seen during the recession. The expectations component has collapsed since early this year and the latest reading is 47.0, the lowest level since 1980. The text of the report was even more dire than the indexes would indicate; “An all-time record number of consumers cited income declines when asked to explain how their finances had recently changed and the largest proportion of consumers ever recorded expected no increase in their income during the year ahead…The state of consumers’ finances is bleak. Half of all consumers reported that their finances had recently worsened for the third consecutive month. When asked to explain their situation, 39% of all consumers cited income declines, the highest percentage ever recorded. Four-in-five consumers anticipated no improvement in their finances during the year ahead in early October. Among all households, 65% expected no income increase during the year ahead, the highest level ever recorded. Even with relatively low inflation, the majority of households expected declining inflation adjusted incomes in the year ahead.”
Retail Sales is the round hole into which the square peg from Michigan does not fit. Sure there is no need for a monthly match between sales and sentiment, but over the long run the two reports used to sing the same song, just not the same chorus each and every month. Both the annualized rate of sales and consumer sentiment found a bottom in late 2008, however their paths have been divergent from the beginning of last year. It has now become obvious that the two indexes have not spoken to or texted one another at all in 2011; sales remain firm while sentiment has collapsed. Why the disharmony?
There is a relationship between retail sales and the stock market; the wealth effect. This was something Bernanke wanted to tap into by doing quantitative easing, he wrote about it in the Washington Post the day after the FOMC announced QE2 last November. So it is not unexpected to see sales benefit from a stock market double off the 2009 low. But, while the wealth effect extends to some percent of the population beyond the “one percenters”, there is a limit to how far down the pay scale it reaches. Most of the people depend on an expansion of their earning power in order to expand the amount of goods they put into their shopping carts. But that metric appears to have headed in the opposite direction of the stock market, at least according to a recent report in the New York Times that echoes the latest Michigan survey; “In a grim sign of the enduring nature of the economic slump, household income declined more in the two years after the recession ended than it did during the recession itself, new research has found. Between June 2009, when the recession officially ended, and June 2011, inflation-adjusted median household income fell 6.7 percent, to $49,909, according to a study by two former Census Bureau officials.
During the recession—from December 2007 to June 2009—household income fell 3.2%.” Additionally there has been no extra kick for sales by an increase in the use of plastic. According to Fed data the monthly net change for revolving debt, credit cards, has been negative in thirty-one of the last thirty-five months; in the previous quarter century this figure never declined for more than three consecutive months.
So where is the marginal consumer retail buying coming from? It could be that part of the divergence in the sales and sentiment comes from an issue that is negative for sentiment but that also creates found money for additional purchases. The high rate of mortgage delinquencies, and the apparent increase in what is known as strategic defaults, has created a pot of money that stays with the households but had previously been sent out to the mortgage servicers. I first wrote about this possibility in April 2010, citing that the long, multi-month, delays in processing the delinquent mortgages and finalizing foreclosure, means that these households have more money to spend on discretionary items, or, as may be the case, on necessary purchases they may have done without when they were still servicing their loans.
Back in 2010 economist Mark Zandi of Economy.com estimated that the five million households who were in some stage of default and not paying their monthly housing bills would have as much as $60 billion additional cash over a twelve month period at their disposal as a result. In May 2011 Bloomberg News reported that Michael Feroli, chief US economist at JP Morgan, figured that the “so-called ‘squatter’s rent’ or the increase to income from withheld mortgage payments, will be an estimated $50 billion this year…” A couple of weeks ago research by JP Morgan analyst John Sim noted that “the more sophisticated prime and Alt-A borrowers are significantly more likely to choose to go delinquent, even when they appear to have the means to continue paying,” once their home price went underwater. This report said that the share of strategic delinquencies among the total had risen to about 26 to 27 percent from 20 percent a year ago and this is a group more likely to spend their new found funds.
It should be said that the net increase in the seasonally adjusted monthly total of retail sales for September was up $29 billion from the total seen twelve months before, delivering about an eight percent increase year on year. The figures I’ve cited show that it is at least possible that some portion of the increase in retail sales since the end of the recession are the result of things that are less than positive for the economy as a whole. Another factor is just as dubious, the seasonally adjusted annualized rate of savings has fallen by $114 billion in the year up to August. Given the general condition of the average household this is likely an unappealing last ditch option to stay afloat and not an indication of confidence that this stockpile could be rebuilt in a timely manner because of a rosy view of the future; remember the U of Michigan consumer expectations component is at a three decade low.
This of course does not indicate how sales will continue the rest of this year and especially the prospects for the holiday shopping season. But there is some reason to believe that retailers may not believe in their own success over the last year is sustainable. “When retailers expect that Americans will be crowding into their stores, their orders pile into the nation’s ports in August and September for delivery to stores by late October. But logistics companies say that is not happening this year,” reports the New York Times in a recent story on the nation’s container ports. “’We’re concerned, because usually at this time, your see this peak,’ said Richard D. Steinke, the executive director of the Port of Long Beach in California. ‘We haven’t seen it.’ In fact, the five busiest container ports in the United States said that imports in August 2011 were lower than or even with 2010 volumes. In Long Beach, the second-busiest container port by volume, August imports fell by 14.2% from August 2010. While the port has not yet released September volumes, a spokesman, Art Wong, said it expected about a 15 percent drop from September 2010.” One measure of activity for container ships is the Harpex. Developed by Hamburg shipping company Harper Petersen, it is an index of the cost to rent one of those ships that carries mostly consumer goods. The Harpex rebounded off a record low set near the end of the recession up to a peak in early 2011.
But since then the price of rental has fallen sharply, by almost fifty percent. Part of the calculation for what to charge depends on the number of ships that are available. Earlier this year the number of ships not being used, or “laid up”, was quite low, but in recent months that amount has increased. According to a report yesterday in the Hellenic Shipping News, an industry standard, “the amount of tonnage being idle has finally picked up, but as demand has been struggling hard to take off, the amount of tonnage that needs to be laid up to bring balance is a good way beyond the current level.” So, some of the weakness in the Harpex could be the result of the number of ships that have been added to the fleet in recent years, but it is also the result of a fall off in demand and that in part reflects back to the anticipated retail sales for this holiday season.
While the market will react to economic data as it is presented, I think it is worthwhile to pull back the curtain once in a while to understand better the why’s and wherefore’s of it. In the case of the round hole and the square peg that are retail sales and consumer sentiment, I think it is reasonable to assume that at some point one or the other will have to be whittled down in order to make for a more comfortable fit.
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