“Autos are the big story in March,” said Econoday, “jumping 2.0 percent and finally shaking off the long lull following the replacement surge of September’s hurricanes. Excluding autos, retail sales managed only a 0.2 percent gain following only 0.2 percent and 0.1 percent gains in the prior two months in results that do not point to much consumer strength.”
Will April spending improve with the vaunted tax cuts that are putting more money in consumers’ pockets, or will consumers build up their savings, still at record lows of late? So far, just one-third of the tax cuts are benefiting consumers, while two-thirds are going into stock buybacks or CEO pay. That is what was projected by early analyses of its benefits.
Most consumer spending shows up in department stores which are having a very hard time, falling 0.3 percent after February’s 0.9 percent plunge. Clothing stores also posted a big decline in the month, at 0.8 percent, as did building materials at minus 0.6 percent and sporting goods at 1.8 percent.
If consumers don’t receive more of the vaunted tax savings, the economy won’t grow faster than the current 2.5 percent annual average, while the budget deficit could soar to $1B in the latest CBO forecast.
This means corporations have to use more of their record profits to boost employees’ pay, rather than CEO salaries and stock prices if we want to pay down any of that debt, as well, since consumers power two-thirds of economic activity.
One major impediment to future growth will be interest rates—especially short-term rates—if they continue to rise faster than they should in this low inflation environment. The so-called yield curve—the difference between long and short-term interest rates—is flattening, which will restrict borrowing if it continues. It really means short-term rates that the Fed sets are rising faster than long-term rates, which key more to inflation expectations.
And in times such as these, with all signs pointing to future uncertainty in economic (trade wars) and geopolitical (Putin, et. al.) policies, consumers can become even more cautious in their spending ways, which would also defeat the purpose of the Republicans’ tax cuts.
Harlan Green © 2018
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