I find it hard to believe as I write this that the S&P 500 is down a mere 1.7% for last week after the recent S&P downgrade of U.S. government debt. And with all the stunning up-and-down days, we ended the week with a fairly typical weekly rate of change in stock market prices. U.S. Government bonds were one of the best-performing assets last week, seemingly thumbing their noses at S&P. While psychologically devastating, the downgrade didn't change much from a practical standpoint. I'm hopeful this will prove to be another "Y2K" moment--a wildly anticipated and prepared-for calamity turning out to be a nonevent. Furthermore, the downgrade didn't provide investors with any news that wasn't already blatantly obvious to investors and consumers alike.
Fed Vows to Hold Rates--No QE3 for Now
Thank goodness the Fed didn't give in to the market and implement QE3, which I think would have proved ruinous by continuing to buoy commodities and financial markets at the expense of consumers. They did offer to try to keep current low rates through mid-2013, ending debate on what they meant by an "extended period of time." The Fed also reduced its outlook for the economy.
But as I said in last week's column, now is not the time to give up on this economy. The healthy--if not necessarily robust--data continue pouring in. After the positive jobs report from two weeks ago, we added a nice monthly retail sales report for July last week along with another improvement in the initial unemployment claims report. Weekly retail sales held up well, even in the face of awful market headlines. Positive earnings continued last week too, as results from Cisco (CSCO) and certain retailers, especially at the high end, helped lift the market. Gasoline prices are dropping as well; the national average price of gasoline fell back to $3.62 from its May high of $3.99 with a slight upward detour in July. Coming with some cooler weather and discount prices, the back-to-school season could be better than expected for consumers.
Consumers Not Giving Up the Ghost Yet
After the positive batch of same-store retail sales for July, I wasn't surprised that the more comprehensive government retail sales report showed a very healthy growth rate for July at the same time that May and June numbers were also revised upward. Between June and July total sales grew 0.5% (6% annualised), while sales compared to a year ago were up a healthy 8%. Even excluding auto sales, which many correctly guessed would help the report, sales grew at the same 0.5% rate. Gasoline sales, aided by higher prices, also helped the overall growth rate by over 0.1%
Because of the annual changes in the retail sales calendar of promotions, massive seasonality factors, and weather issues, I prefer to look at retail sales on a year-over-year basis. I also like to look at a three-month moving average rather than just one month's worth of data that can be subject to a lot of the special factors mentioned above. I also exclude autos (an earlier monthly report is the feeder report used to compile GDP reports) and gasoline (volatile prices that get adjusted out in the final inflation adjusted GDP report). On this basis it's hard to claim consumers are running for the hills just yet.
By category, things were relatively consistent; most categories grew at about the 0.5% average for the month. Gasoline stations, electronics stores, and miscellaneous did better than the average, while sporting goods, books, and the hobby category declined, as did building materials. I suspect the demise of Borders and the rise of e-book readers like the Kindle will continue to hurt the books category. Building materials were coming off a double-digit, weather-induced swing the previous month. Only the restaurant figures, showing a 0.1% decline, were at all disturbing. I'd expected a small gain based on warm weather in July, which tends to favor restaurants. Apparently higher gas prices trumped warm weather again. Based on strong grocery store sales and weak restaurant sales, I suspect consumers opted to eat in this month. Nevertheless, it's disappointing to see slowing restaurant sales, because that's a decent forecaster of short-term consumer confidence and employment (no job, no quick run to Mickey D's for lunch). With gas prices backing off again in August and weather staying hot, maybe restaurant sales will look better in August.
Despite Market Volatility, Weekly Sales Still Look Good
The really short-term (weekly) and volatile International Council of Shopping Center data softened just a touch but still looked positive, not far off previous levels and above the 2011 average of 3.0%.
I usually prefer to look at this set of data on a four-week moving average basis to wipe out weird weather or promotions or even changing dates for sales tax holidays. The four-week moving average data look even better than the results above. However, I wanted to pinpoint what happened the week where all hell broke loose in the financial markets. As this table shows, consumers didn't panic as much as Wall Street.
