A bullish contradiction 🛍
What consumers are doing is far more bullish than what they're saying 🙉
Despite widely-reported disruptions tied to Omicron and frustrations about inflation, the U.S. economy continues to perform very well.
Retail sales in January jumped by 3.8% from December to $649.8 billion. This was much better than the 2% increase expected by economists. This was the biggest jump since March 2021, when stimulus checks were hitting Americans’ bank accounts.
From Bloomberg: “Eight of the 13 retail categories rose in the month. Sales at non-store retailers surged 14.5% after plummeting in December. Motor vehicle sales rose 5.7% following a decline in the prior month. Home furnishing stores also posted a solid sales advance. Receipts at restaurants and bars, the report’s only services-oriented category, fell 0.9%, likely reflecting the record surge in Covid-19 cases seen in January.“
Wells Fargo economists noted that consumer spending “may have lost some momentum in the final months of 2021, but today's retail sales report for January says that consumers have swaggered into 2022 undaunted by soaring inflation and soaring COVID cases that month.”
Some of the gain is attributable to inflation (i.e. stuff just costs more). But not all of it.
“Last week we learned the consumer price index rose a better-than-expected 0.6% during the month, while goods prices specifically rose another 0.8%,” the Wells Fargo economists added. “While not perfectly comparable, goods consumer prices can be used as a proxy to estimate inflation-adjusted retail sales, and the gain in January prices still suggests real sales rose a whopping 2.95% last month.”
What consumers do > what consumers say
One thing that has been made very clear over the past year is that what consumers say sometimes contradict what consumers do.
Yes, it’s the case that consumers are noticing inflation in their everyday lives, and they’re not thrilled about it. According to the University of Michigan, consumer sentiment is at its lowest level since October 2011 due to “weakening personal financial prospects, largely due to rising inflation.“
And it turns out that overall, having the capacity to pay is more than offsetting the downside that comes from negative sentiment tied to inflation. It’s a contradiction that’s proving bullish for businesses and investors in those businesses.
"We haven't seen any meaningful difference yet in how they're shopping,” Brett Biggs, CFO of Walmart, told Yahoo Finance’s Brian Sozzi on Thursday. “We know consumers are focused on inflation, but we're not seeing major changes in shopping patterns."
Biggs’ statement came after Walmart reported better-than-expected quarterly sales and earnings growth. WMT shares surged 4% following the news.
For investors, what consumers do matters much more than what consumers say. Spending, not sentiment, powers business activity, which translates into earnings growth.
Some recent features from TKer:
📈 Stock market declines: The S&P 500 fell 1.6% last week. It’s down 8.8% since the beginning of the year but up 10.6% from 12 months ago. For more on market volatility, read this.
⛓ Supply chains improving: According to Census data released Wednesday, the inventory/sales ratio1 for all businesses stood at 1.29 in December, down from 1.35 during the prior year. Back in February 2020, before the pandemic disrupted the supply chain, this ratio was elevated at 1.42. While inventory levels remain depressed, they are at least improving. “The sixth sequential month of accelerating inventory gains is an encouraging sign that supply chains’ worst snarls are behind us,” Oren Klachkin, lead U.S. economist at Oxford Economics, wrote on Wednesday. “We look for inventories to continue rising this year as businesses work to fulfill backlogged orders and supply-side constraints very slowly ease.“ For more on this, read this.
📈 Mortgage rates rise: The average rate for the 30-year fixed rate mortgage jumped to 3.92% from 3.69% the week prior. From Freddie Mac: “Mortgage rates jumped again due to high inflation and stronger than expected consumer spending. The 30-year fixed-rate mortgage is nearing four percent, reaching highs we have not seen since May 2019. As rates and house prices rise, affordability has become a substantial hurdle for potential homebuyers, especially as inflation threatens to place a strain on consumer budgets.“
🏘 Home sales surge: Sales of previously-owned homes jumped 6.7% in January to an annualized rate of 6.5 million units, according to the National Association of Realtors (NAR). “Buyers were likely anticipating further rate increases and locking-in at the low rates, and investors added to overall demand with all-cash offers,” Lawrence Yun, NAR's chief economist, said on Friday.
Sales might’ve been even stronger were it not for the record low inventory of homes.
🏘 But new home construction falls: Housing starts fell 4.1% in January from December, according to Census data released on Thursday. This was the first decline in four months. However, building permits climbed by 0.7%. Taken together, the data suggests the challenge in the housing market continues to be supply, not demand. “The availability of labor and lots also remain key headwinds, with labor likely to become more challenging in 2022,” Robert Dietz, chief economist at the National Association of Home Builders, wrote on Thursday. For more on this, read this.
🏨 People are staying at hotels: From WSJ: “Marriott International Inc. said demand for business and leisure travel continued to grow in the holiday quarter despite a setback from the spread of the Omicron variant. Marriott, whose portfolio encompasses nearly 8,000 properties world-wide, said Tuesday that its quarterly revenue more than doubled to $4.45 billion from a year earlier, when Covid-19 cases were surging and health officials warned against travel.“
🏡 People are staying at Airbnbs, too: From Airbnb: “Specifically, gross nights booked in December 2021 grew more than 40% from 2020, and the cancellation rate for December trips was lower than a year ago. And despite the continued near-term uncertainties, we see evidence of strong pent-up demand: as of the end of January 2022, we had over 25% more nights booked for the summer travel season than at this time in 2019.“
🎈Wholesale prices are still rising: On Tuesday, we learned the producer price index rose by 1.0% month-over-month in January. This reflects a 9.6% increase from a year ago. Producer prices reflect what businesses pay for the materials that go into the goods they eventually sell to their customers. And while businesses will make an effort to absorb some of those higher costs, they'll pass some of the costs on through consumer price hikes. For more on this, read this.
Up the road 🛣
Friday comes with the January personal income and spending report, which will include an update on the Fed’s preferred measure of inflation: the core personal consumption expenditures price index. Economists estimate this inflation metric climbed by 0.5% from the previous month or 5.2% from a year ago.
The inventory/sales ratio reflects how much of a business’s inventory goes out as a sale in a month. If the ratio is at 2.0, then the business stocks twice the amount of goods that it sells. If the ratio is at 1.0, then goods are getting sold as quickly as it gets stocked.