To understand how most of America is doing, you need to start with consumer spending.
Consumption makes up about 70% of U.S. GDP. And imports play a big role in a lot of what we consume, whether as components or as finished goods like phones and cars. In other words, the ebb-and-flow of imports is highly correlated to retail sales.
The trend through the third quarter (Q3) was for imports to stabilize. And that’s also what we see in the retail sales growth: a steady 3% year-over-year (yr/yr).
However, imports have suddenly pulled back in the beginning of the Q4 (which is significant because Q4 is holiday season when a lot of merchandise should be coming from China to be sold as holiday gifts). Container imports through major U.S. ports (Los Angeles, Long Beach, New York, New Jersey & Savannah) contracted in September.
This is a volume problem: demand for stuff suddenly declined. We could be looking at a disappointing Q4 retail season.
But it’s not just retail sales. We can look at trucking demand to show us another sign of stable, but soft demand for goods. After all, it is the trucks that get things like retail to the consumers.
Consumer spending expectations are quite lofty… and are set up for missed expectations. The National Retail Federation predicts a 3.6% jump in 2016 holiday sales. A big jump over last year’s 3.2%.
One way to reconcile the soft goods imports with strong holiday seasonal spending: tomorrow’s holiday spending is coming at the expense of spending today. We have become a nation of consumers who are event-driven in spending. Halloween, Thanksgiving, and so on. But in-between these events, we spend less. In other words, we budget for the big events and then curtail daily spending.
And that explains why a restaurant recession is underway: something has to give and that something is dining out.
Consumers are pulling back… spending in-line with wage growth.
If we work our way backwards, this means the factories which make all the “stuff” may disappoint.
Last year Q4 saw a sharp pullback in manufacturing inventory builds. We can say that a bottom is in. But still, there is no indication of growth.
You see, companies have no reason to invest given the significant supply overhang.
Factories have plenty of room: capacity utilization continues to trend down, now hovering close to 2013 levels.
The next phase will be for markets to price in the less bullish situation.
Inflation is coming partly because it has been mandated (minimum wage hikes, Obamacare induced inflation) and partly because fuel prices are rising (CPI excludes food and energy, but higher fuel prices will spark inflation everywhere in the economy).
While the inflation won’t be sharp, it comes during a period of low/no economic growth.
Stagflation with a lower-case ‘s’.
Sincerely,
Andrew Zatlin
Editor of Moneyball Economics
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