Any news is good news

Bottom line

Retail sales slowed sharply in April, as the early Easter season this year likely pulled sales forward into a relatively strong March. At the same time, retail inflation, as measured by the Consumer Price Index (CPI), eased. Core CPI slipped to an in-line 3.6% year-over-year (y/y) from 3.8% in March. The financial markets ignored the disappointing sales figure to cheer the CPI print, as the latter likely takes the risk of a Federal Reserve interest-rate hike off the table.

But business and consumer confidence metrics across the board have slowed meaningfully over the last several months. Moreover, the labor market also appears to be slowing, as initial weekly jobless claims—an important high-frequency leading employment indicator—are just off a 9-month high and rising. 

Record highs for equities Despite the collection of mostly downbeat news, the S&P 500 broke 5,300 for the first time yesterday, hitting a new intraday record high of 5,325. Stocks have rallied by more than 7% over the past month. That not only reverses the 6% correction we saw in March and April, but also extends the equity market’s rally to a nearly 30% gain since last October. Also hitting new records yesterday were the Dow Jones Industrial Average, which broke above 40,000 for the first time, and the NASDAQ Composite Index, reaching at just under 16,800. 

April’s marginal improvement in CPI likely also helped to spark a rally in bonds over the past three weeks, as benchmark 10-year Treasury yields have declined from 4.75% on April 25 to 4.30% yesterday. At the same time, the first-quarter corporate reporting season is more than 90% complete, and results have been stronger than expected for the third consecutive quarter. Revenues are up 4% from a year ago, while earnings have grown by about 5%. The Volatility Index (VIX) has plunged by 42% over the past month, falling from its spike of 21 on April 19 to around 12 yesterday.

Abundance of optimism There appears to be a tremendous amount of optimism built into the rally. Given the uncertainty surrounding the trajectory of inflation and the Fed’s possible response, the slowdown in economic growth, the softening labor market and the election, we believe there’s potential for moderate profit-taking from record highs over the next several months. 

Weak April retail sales Nominal retail sales in April were unchanged on a month-over-month (m/m) basis versus the consensus call for growth of 0.4% and much lower than the  solid 0.6% gain in March. Control results, which exclude food services, gas stations, auto dealers and building materials stores, and which feed directly into quarterly GDP calculations, were much weaker. They declined by a worse-than-expected -0.3% m/m in April (consensus at a gain of 0.1%), while March rose by a strong 1.0% m/m.

Early Easter steals some April results Easter came early this year (March 31), which shifted some retail sales into March from April. Because of the annual calendar rotation with Easter and Passover (which started late, on April 22), we combine the months when assessing consumer behavior.

‘Marpril’ growth solid The combination of a strong March and a weak April this year pushed retail sales up by a solid 3.4% y/y, compared with a soft 2.0% Marpril gain in 2023 and strong 7.9% growth in 2022. To be sure, that pales by comparison to the powerful 39.9% y/y rebound in Marpril 2021. But that was compared to depressed 2020 results that had plunged by -13.0% y/y due to the pandemic. 

A more reasonable comparison is to exclude the extreme years and look at average Marpril y/y sales as a touchstone. Over the past 20 years, growth has averaged about 4.0%, within a range of 1.6% to 7.9%. So, this year’s 3.4% is modestly below average. 

Savings rate falling The personal savings rate in the U.S. has averaged 6.6% over the past 40 years. But in the wake, in our view, of overly generous federal fiscal stimulus during the pandemic, it spiked to 26.1% in March 2021 before declining sharply to a 17-year low of 2.7% in June 2022. We think this fueled outsized retail spending during 2021. 

From there, however, the savings rate rebounded to 5.3% in May 2023, which suggests consumers were spending less and saving more, perhaps concerned about the risk of recession. More recently, the rate declined from 4.1% in January 2024 to 3.2% in March, which we believe helped to fuel strong March retail spending. That’s not sustainable, of course, which is likely why spending on goods slowed during April, a trend that we think has legs over the course of 2024.

Moreover, excess savings plunged by 98% over the past 30 months, from $2.2 trillion in September 2021 to $40 billion in March 2024. At that average monthly pace of $72 billion, savings will likely be fully depleted this quarter. Credit card usage, which soared by 17.4% in 2022, slowed to 8.7% growth in this year’s first quarter, and credit card delinquencies have more than doubled from 1.5% in the third quarter of 2021 to 3.1% in the fourth quarter of 2023. 

Marpril a leading indicator The March-April period is the third most important retail-sales season. Back-to-School spending (June through September) rose by 2.8% y/y in 2023, down from 9.7% in 2022 and 14.7% y/y in 2021. Christmas (October through January) slowed to a 2.7% y/y gain in 2023 (its weakest in five years), compared with 7.2% in 2022 and 15.3% in 2021. These three periods have been 80-90% positively correlated over the past 30 years, and consumer spending accounts for 70% of GDP. 

Business and consumer confidence fading Importantly, these metrics have been declining, which suggests that retail spending on goods and services should continue to slow: 

• NFIB Small Business Optimism Index plummeted to a level just off an 11-year low at 89.7 in April 2024, down 13% from June 2021’s cycle high of 102.5. 
• Conference Board’s Consumer Confidence Index has plunged to a two-year low of 97.0 in April 2024, down nearly 25% from a cycle peak of 128.9 in June 2021. 
• University of Michigan’s Consumer Sentiment Index fell to a six-month low of 67.4 in May, down 15% from 79.4 in March 2024, while inflation expectations turned higher. 
• NAHB Housing Market Index (HMI), a measure of homebuilder confidence, soared from 34 last November 2023 to 51 in both March and April 2024. But May 2024 declined for the first time in six months, falling to a much weaker-than-expected 45. 
• Leading Economic Indicators (LEI) Index fell by a much weaker-than-expected -0.6% m/m in April 2024 and has now declined sequentially in 26 of the past 28 months. The index hit a four-year low of 101.8 last month, down 14% from its record high of 118.6 in December 2021. Historically, an LEI decline of this magnitude has been a very reliable recession signal over the past seven recessions spanning half a century, although we are forecasting a soft landing in the current economic cycle.              

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