Consumers Off to a Sluggish Start for Q1, Taxes Matter
- January Retail Sales increased by just 0.1 percent as consumers adjusted to higher taxes.
- Ex-auto Retail Sales gained 0.2 percent as general merchandise stores gained 1.1 percent.
- The NFIB Business Optimism Index ticked up in January to 88.9, still depressed.
- December JOLTS data show little change in labor market conditions through year end.
The retail sales report for January is susceptible to economic spin. Because sales last October, at the start of the fourth quarter, were weak, and we had a rebound in November and December, we can say that the level of sales in January is not bad and is consistent with moderately expanding real consumer spending for Q1. However, if we focus on the month-to-month change in sales (or near lack thereof) we have to say that January was weak. Total retail sales for January increased by just 0.1 percent, in line with expectations. It looks like tax increases and ongoing uncertainty about the debt ceiling and the spending sequester did take a toll on consumers. Perhaps there was some giveback from the rebound in sales in November and December post-Hurricane Sandy. Consumer confidence, as measured by the Conference Board, was down in January, but consumer sentiment, as measured by the University of Michigan, was up. House prices have been increasing, providing a positive wealth effect. Stock prices were on a tear through January, also providing a lift to spending. Gasoline prices increased through January. So however you want to spin it, you can. What is most important is what consumer spending does over the next couple of months. The drag from higher taxes becomes more real to lower income households and the drag from reduced federal spending likely gets worse in the months ahead. However, job creation is the antidote to fiscal tightening. We continue to expect somewhat sluggish consumer spending through February and March, but not an outright retreat. With consumers reacting to both good and bad news, caution rules the day. As long as payroll job creation remains in the range of 150,000 per month or more, then consumers will spend, but not with abandon.
The January business optimism index from the National Federation of Independent Business increased slightly to 88.9, which is still a depressed level. The commentary to the January index stressed the flow of bad news to business owners. The metric for small business hiring looks mildly positive, and planned hiring is on a positive trend. The Job Openings and Labor Turnover Survey (JOLTS) data for December was less positive, showing essentially flat-lined job openings through 2012 and a mildly deteriorating hiring trend through the second half of the year. The wobbly economic expansion is expected to continue even as the headwind from fiscal tightening increases. Ongoing moderate job growth is an essential support in overcoming that headwind.
Market Reaction: Equity markets opened with gains. Treasury yields are up at both ends of the yield curve. NYMEX crude oil is down to $97.26/barrel. The dollar is down against the yen and up versus the euro.
Click here for a PDF version of the Comerica Economic Alert: Retail Sales 021313.