Everyone knows the data contextualization rules: 1 month is not a trend while 3 months of congruous data can generally justify a convicted view of underlying trends.
The rules are less clear around 2 months …. Counter-trend move or emergent phase transition? … it’s kind of the purgatorial nexus of cognitive dissonance.
Anyway, February marked a 2nd month of underwhelming consumption growth and while the softness wasn’t particularly surprising given the weakness in Retail Sales, there were a few notables across the internals worth highlighting:
Short the Rich: Long high-ticket discretionary consumption has been a running macro sub-theme over the last 6 quarters alongside the progressive acceleration in headline growth and rampant, one-way asset price inflation. After cycle high growth in 2017, Luxury consumption is part and parcel of the broader COMP-STERNATION dynamic as we roll through the year (see the linked note for a review of prevailing base effect dynamics across a broad swath of high frequency domestic macro). Luxury consumption decelerated to +5.8% Y/Y in February, the slowest pace of growth in 13-months. We’ll have to wait for the March data for confirmatory evidence but the reality of harder comps, vol sensitivity and a lack of asset price inflation are inexorable realities.
Tax Reform: The obligatory caveat, of course, is that this is February data. Tax withholding changes didn’t hit until ~mid-February, so any impact would only really begin to manifest in the reported March data.
Income Growth: Income growth remained solid but decelerated sequentially on a year-over-year basis across all of the aggregates. Again, we’ll have to wait until next month to see the larger impact of tax reform on disposable income and the flow through proclivity for discretionary spending. Also, recall, corporate bonuses aren’t captured by the BLS in the hourly earnings data so those figures broadly understate the improvement in discretionary consumption capacity.
Savings Rate: The savings rate ticked higher for a 2nd month to 3.4%, up +20 bps sequentially and a full +100 bps from the December low. We’ve highlighted the income-consumption-savings dynamics recurrently the last few months but to quickly recap:
The trend in income growth will become increasingly important to consumption as the tailwind from a declining savings rate diminishes and payroll growth continues its late-cycle deceleration. Remember, simply, how this works …. If your income is the same but you save less, consumption is higher. The Savings Rate printed a 2-handle (2.4%) for the 1st time this cycle in November/December and the decline in the savings rate over the past year has been a notable support to consumption growth alongside flattish aggregate income growth. The Savings Rate has been falling ~80-100 bps year-over-year and unless we continue to plumb new lows, the tailwind to consumption growth will progressively recede.
Confidence vs Savings: There exists a strong negative relationship between confidence and the savings rate. We are already near historic lows in personal savings and tax reform probably buttresses that trend nearer term but if confidence is, in fact, peaking then the savings rate may be similarly bottoming. All else equal savings ↑ = consumption growth ↓.
Labor: Initial claims fell again in the latest week and remain at multi-decade lows. From a cycle accounting perspective, Initial Jobless Claims have been one of the best pace keepers of the economic cycle with the rolling trend in claims serving as one of the most consistent lead indicators for the labor market and broader macro cycle over the last 7 cycles. Lower lows in initial claims are supportive of further labor market tightening and net payroll gains in March and continue to suggest recession risk and big credit market dislocations are not imminent.
In short, while noisy, the February data is notable and supportive of our expectation for a peak in headline growth in 1H18. As a reminder, we’ll review and contextualize the recent shift in market and macro dynamics and detail the fundamental, base effect and risk management dynamics underpinning our growth and inflation outlook in our 2Q18 Macro Themes Call next Tuesday.
