Retail sales have slowed markedly since the fall of 2019, with monthly overall sales up just 0.3 percent, and rising 3.9 percent annually without volatile gasoline prices. This means the U.S. is basically stuck in a slow growth mode, since more robust growth (+3 percent) would mean 5-6 percent annual retail sales. And that is worrisome to financial markets that have been pushing down bond yields as a hedge against a further slowing of economic activity.
Consumers seem to remain optimistic, however, in part because they love the very low consumer prices, hence low inflation, which boosts spending. But optimism is also fueled by plentiful jobs, per the University of Michigan sentiment survey.
“Consumer sentiment rose to 100.9 in early February to nearly match the expansion peak of 101.4, set two years ago in March 2018,” said its press release. “The Expectations Index, the main gauge of future economic conditions, rose to 92.6, also its second highest level in this long expansion. (But) both measures were still significantly below the levels recorded twenty years ago when the Sentiment Index reached a peak of 112.0 and the Expectations Index peaked at 108.6.”
Part of the sluggishness in growth comes from the decline in manufacturing, now in its fifth month of shrinkage. Employment in construction, mining, logging and manufacturing industries ramped up sharply in his first two years in office, according to the latest figures released Friday by the Bureau of Labor Statistics, but overall output fell 0.3 in January, with the biggest negative impact coming from a weather-related 4 percent drop in utility usage.
Motor vehicle and parts production did post a 2.4 percent increase last month, but even that was a little disappointing, with Reuter’s forecast having called for a 4 percent rise. On the other hand, the mining sector was a positive surprise, posting a solid 1.2 percent increase, per Reuters ICAP update.
Some blue-collar jobs have come back in Trump’s first two years, but not nearly as many as had been lost. Most of the jobs have been lost forever to automation or cheaper manufacturers around the world.
Crippled by the trade war and collapse in investment, job growth in blue-collar sectors slowed to a trickle over the past year. Meanwhile, job growth in the services-producing industries has actually strengthened, especially in health-care and in the quintessential pink-collar and white-collar jobs, per Friday’s unemployment report.
The bottom line is that most consumers can’t spend more because they don’t earn enough to spend more, since most have jobs in the lower-paying service sector these days. And their optimism is held in check by the fact that anything can happen over the coming months, as we have been saying, which is why interest rates are extremely low and could fall further.
The 10-year bond yield slipped back to 1.59 percent Friday, which also means investors are worrying about future stock market gains with current S&P P/E ratio now 20. It is 5 points above its long term average of 15 times earnings, and corporate profits are predicted to decline this year.
Harlan Green © 2020
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