Looking Past Now

Softening retail sales over the winter sparked fears of a slowdown, but more comprehensive indicators show the economy carrying momentum into the spring.

Retail sales softened modestly over the winter, but any pullback in the consumer sector now appears to have been transitory, if not illusory. Spending rebounded through the first quarter of 2019, and more comprehensive measures of economic health show that the economy likely never departed from its 3 percent growth trajectory.

This winter’s worries over consumer spending illustrate the volatility of high-frequency data. It’s important to look for confirmation from multiple indicators before assuming that a downturn in one sector signals a shift in the entire economy. Data is not a forecast.

Why Are Retail Sales Declining?

Year-over-year retail receipts declined in December and January. Because the consumer sector makes up approximately two-thirds of the US economy, a sustained downshift in spending would certainly be cause for concern. But consumers don’t change their behavior in a vacuum—any meaningful decline in spending would be accompanied by deteriorating conditions across the economic landscape. On their own, high-frequency retail sales figures say little about the true direction of the economy.

Monthly retail sales growth has fallen into negative territory four times during the current expansion, and these episodes were all followed by an equally sharp rebound as consumers released a wave of pent-up demand in subsequent months. Today, the absence of distress in other economic indicators suggests that this winter’s weak retail sales aren’t symptomatic of a broader slowdown.

Volatility and Energy

One factor that can skew retail receipts is the fluctuating price of gasoline. Several of the nation’s largest retailers have also become major fuel sellers; when the price of gasoline falls, overall revenues slump. The Bureau of Economic Analysis attempts to correct for energy-related volatility in core retail receipts, but the current adjustment is based on a 2012 survey of business sales. Because many consumers are now buying gasoline at big-box stores, energy volatility affects core retail sales. That’s why trends in core retail sales closely mirror trends in gas station revenue

It’s probably no coincidence that this winter’s retail weakness was accompanied by sharply lower gas prices. Falling energy prices create crosscurrents for the US economy, dampening capital investment while lifting commuters’ disposable income. Cheaper fuel should be a net positive for the consumer sector even if retail receipts fall along with prices at the pump.

The State of Households

Consumer spending may power the economy, but consumers are highly reliable—when US households have disposable income, they tend to spend it. Changes in the saving rate occur gradually, over the span of years or decades. In the near term, the health of the consumer sector is tightly bound to the labor market and changes in household wealth.

And on this front, the winter’s consumer sector weakness appears to be a passing concern. Layoffs remain near historic lows, hiring has maintained an above-trend pace and wages are climbing well ahead of inflation. The labor market’s strength is lifting real disposable income at a 3 percent annualized rate, and rising real estate prices are lifting household wealth. Ultimately, climbing household incomes will likely mean a sustained pace of strong consumer spending.

Looking at the Big Picture

High-frequency retail sales reports provide a detailed view into a small slice of the economy. Broader indicators like layoffs can provide valuable context. Since almost all workers are enrolled in unemployment insurance programs, the rate of new filings provides a comprehensive and timely overview of the conditions facing all businesses—not just one sector.

Looking at layoff data from this past winter, the picture appears optimistic. Businesses saw no reason to cut staff, and new filings for unemployment insurance remained historically low despite the consumer slowdown. This implies that demand in other sectors remained robust, and even the hardest-hit retailers were confident the slowdown would soon pass.

Watching for Recession

At the top of the business cycle, it’s natural to watch for signs of the next downturn. But recessions require a trigger, and none is apparent today. The Federal Reserve has signaled it will tolerate a period of above-trend inflation before raising interest rates to curb growth; with inflation still resting at the official 2 percent target, it seems unlikely that the Fed will step on the brakes anytime soon.

Recent recessions have been triggered by the rapid deflation of an asset bubble, but there’s no obvious financial imbalance arising today, no corollary to the run-up in dotcom stocks in 2000 or the housing bubble whose collapse ended the last business cycle.

High-frequency indicators are valuable, but they’re not a forecast. In the absence of confirmation from broader indicators of economic health, it’s reasonable to assume that the recent slip in retail receipts could soon be reversed.

View our economic commentary disclaimer.

For more insights, visit the JPMorgan Chase Commercial Banking website.