In April 2011, US headline retail sales rose by 0.5%m/m. The market was expecting a rise of 0.6%m/m. This is the tenth consecutive monthly improvement in overall retail spending, following a decline in mid-2010 that, at the time, raised fears of a ‘double-dip’ recession.
Importantly the growth rate for each of the previous two month’s data has been revised up from 1.1%m/m to 1.3%m/m for February 2011 and from 0.4%m/m to 0.9%m/m for March 2011. On an annual basis, US retail sales are up a very respectable 7.6%y/y (in nominal terms), although this is down from 9.1%y/y in February.
If motor sales are excluded, retail sales rose by a slightly higher 0.6%m/m in April 2011 (in-line with expectations). However, if vehicle and gasoline sales are excluded (i.e. core retail sales), retail spending was up only 0.2%m/m, well below expectations for a rise of 0.5%m/m (see chart attached on core retail activity). On an annual basis, core retail spending has lost some momentum.
It is fascinating to see the continued strong rise in ‘non-store retailing’ which includes electronic on-line shopping. Non-store sales rose by a further 1.0%m/m in April and are up a robust 15.5%y/y over the past year.
As mentioned last month, after a long period of consolidation, in which US consumers repaid debt (on a net basis) each month for 20 consecutive months, the household sector has measurably improved their financial position and has systematically increased their activity levels.
The improvement in the consumer environment is now reflected in a range of indicators:
- US consumer confidence has trended higher in the past 7 months. It is still well below the long-term average level of confidence and massively below the peak level, but it has certainly improved meaningfully relative to the all-time record low in February 2009.
- US vehicle sales have risen consistently over the past year and are now back to the levels recorded in August 2008 (ignoring the impact of the ‘cash-for-clunkers’ deals). Volumes are still below their peak levels achieved in earlier years, but have shown a meaningful improvement in recent months.
- US personal income and expenditure has risen on an annual basis in each of the past 12 months, and continues to improve.
- US personal savings rose from an average of only 2.1% of disposable in 2007 to an average of 5.8% of disposable income in 2010. While this is still not an especially high level of savings (a more appropriate rate would be around 10% of income) it is certainly a more respectable level.
- Over the past twelve months the US economy has created 1.3 million jobs, at an average of 109 000 jobs per month. Despite this improvement, US employment is still a massive 6.9 million below the level prior to the start of the recession.
- At the end of Q4 2010, US consumer debt to disposable income was recorded at 120.9%. While this is still relatively high, it is the lowest level of household debt relative to household income in the US for 6 years and well below the peak of 135.2% recorded as recently as Q4 2007.
- The burden of servicing household debt in the US peaked at 14.0% of disposable income in Q3 2007. It has since moderated to 11.75% in Q4 2010, helped by the reduction in debt levels and lower interest rates. This is the lowest debt servicing cost the US consumer has experienced since Q1 1999.
- US home owner’s equity has stabilised in the past year, having fallen by a massive $7.5 trillion during the credit crisis.
- US net household wealth has risen by around $8 trillion since the low in Q1 2009. This improvement reflects a combination of higher asset values (+$7.9 trillion, mainly due to rise in the value of equities) and lower debt levels (-$193bn). Net wealth remains a massive $8.8 trillion below the previous peak.
The above data suggests that US households are in much better financial shape now than just a year-ago, and that consumer income and activity levels have recorded a meaningful improvement since the Great Recession. However, this does not imply that households are about to embark on a massive debt/spending spree. Rather, we expect US consumer activity to continue to show a steady improvement, with the growth in employment dictating the overall pace of growth in household spending.
It is also useful to recognise that while most aspects of consumer activity have improved measurably over the past year, the housing sector remains depressed and has still not shown any improvement in terms of both activity levels as well as pricing. In total, the average US house price remains more than 31% below the peak achieved in 2006; and has declined in each of the past 6 months.
The recent spike in oil and food prices are obviously also a concern, and will impact negatively on the state of the US consumer. However, these factors are not expected to derail the current economic recovery; but they do lend support to our view that the current US economic recovery is likely to remain somewhat unexciting unless there is a more meaningful increase in employment.
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