Just days after we warned that the US economy is rapidly rolling over, as even the otherwise cheerful UMich chief economist Richard Curtin observed that over the past half century the UMIch survey “Sentiment Index has only recorded larger losses in six other surveys, all connected to sudden negative changes in the economy,” today’s dismal retail sales data was the straw that finally broke the back of any last trace of positive sentiment.
And shortly after we published the summary of the latest Bank of America Fund Manager Survey which showed that overall sentiment had collapsed with expectations for growth, profits and inflation all plunging in August…
… Goldman became the latest bank to chime in with its brutal assessment of the current situation summarized by strategist Chris Hussey’s midday market intel note titled simply “not good.” He explains why:
Retail sales declined 1.1% in July, more than expected, even as core retail sales were revised up for May and June. Notably, the decline comes without the government-imposed mobility restrictions and shutdowns that we witnessed earlier in the pandemic, suggesting that US consumers were electing to stay home and spend less — consistent with the sharp fall last week in the UMichigan Consumer Sentiment Survey. And a look into the individual categories reveals the sharpest deceleration in consumer discretionary items like electronics & appliances, as well as non-store retailers, also perhaps a reflection of some unemployment benefits expiring. A quick look at earnings today from consumer bellwethers WMT and HD also suggest consumer behavior is moderating.
On the supply side of the equation, Industrial Production rose in July, largely driven by an 11.2% increase in motor vehicle and parts manufacturing, while business inventories also increased. Builder sentiment also declined, hitting the lowest level since July 2020, driven by the current sales and prospective sales components, although future sales expectations remains unchanged.
Putting it all together, the Goldman strategist writes that “the combination of lower-than-expected retail sales and auto production in July, and given an increasingly likely drag on services consumption from the Delta variant, our economists are will likely revise our second-half growth assumptions even as we still do not expect material economic impact from the Delta variant in the US amidst abundant vaccine supply and relatively permissive COVID policies.”
Not good indeed, but what BofA said was even worse: in her own take on today’s disappointing retail sales data, BofA chief economist Michelle Meyer stressed that while she expect some marginal growth in retail sales in August, “there are downside risks. Spending at nonstore retailers should bounce but services spending will be weaker – we have seen a clear pullback in spending on travel in the BAC aggregated card data which seems to correspond with the increase in COVID cases. In a similar vein, the University of Michigan consumer sentiment survey plunged in early August as consumers expressed concerns over the rise in COVID cases and high prices”, something we have been hammering the table on for months.
But more importantly, unlike Goldman, BofA did not need to wait days to revise its GDP forecast, and instead Meyer wrote that “after adjusting for higher prices (PCE deflator of 4.4% qoq saar), the softening in nominal spending leads us to track only 1.5% qoq saar for real consumer spending in 3Q. This follows 2Q real consumption tracking of 12.3%.”
Plugging that number into the bigger GDP model, and BofA now finds that “the economy is running at a slower pace in 3Q,” and currently tracking just 4.5% following the retail sales report, down from the bank’s official forecast of 7% qoq saa, which is about to come down significantly.
In short: Biden better find a way to pass another major stimmy, or else the US consumer is toast.