Capital Econ: Real Consumption Figures Remain Weak

The Capital Economics, US Economics Weekly Bulletin focused on the weakness of real consumption during the first quarter this week, (20th April 2015) despite falling energy prices.

Real consumption

After several months of weather-related weakness, retail sales rebounded 0.9% m/m during March but this wasn’t enough to convince the markets that the US economy was getting back on track.

“The slump in energy prices triggered a big surge in households’ purchasing power between November and February. Nominal household spending on gasoline fell by $110bn annualised. The problem is that, while the drop in prices generated a surge in real incomes, households have shown no inclination to spend their gasoline savings on other goods. Underlying retail sales, that is with autos, gasoline and building materials stripped out, actually contracted in December, January and February.”

The first-quarter slowdown in real consumption growth, which came at a time when many were expecting an expansion, confused some economists:

“After all, the slump in energy prices is effectively a tax cut that could potentially boost real consumption by $110bn, or 0.9%.”

However, a similar, inverse puzzle was present during early 2013, when underlying retail sales continued to rise even as taxes were hiked. Real incomes still fell by more than $200bn in early 2013 yet underlying retail sales increased by 1% m/m that January and rose again in February.

Real consumption – Steady upward trend

Underlying retail sales have been following a steady upward trend for the past few years, although sales during the winter periods of 2012 and 2013 briefly climbed above trend (unseasonably warm winters), while in 2014 and 2015 sales dipped below trend (cold winters).

“The same winter weather pattern is present in motor vehicle sales too. If we ignore the slump in 2011, which was caused by supply disruptions triggered by the Japanese earthquake, there has been a very steady upward trend in sales…The key lesson from the past three years is that unusual winter weather, whether it is unseasonably warm or cold, has had only a temporary impact on the level of sales.”

Capital Economics goes on to explain that even after a decent rebound in underlying retail sales and motor vehicle sales in March, there will be more sizeable gains in the spring, taking sales back to earlier trends. Calculations suggest getting underlying retail sales back to the earlier trend will require gains of 0.8% m/m in both April and May.

“Accordingly, even though we estimate that real consumption growth was slightly below 2.0% annualised in the first quarter of this year, we see absolutely no reason why it won’t accelerate to nearly 4% in the second quarter, especially with consumer confidence close to an eight-year high.”

The unemployment market has also been affected by the weather. During 2012 and 2013, periods of unseasonably warm weather, the first-quarter gains in employment were much stronger than the gains in the other three-quarters.

And to sum up:

“While we’re confident that, as this year’s weather distortion is unwound, economic growth and employment growth will accelerate in the second quarter, that may not come soon enough for the Fed to hike rates in June. The meeting is in mid-June, meaning that May’s retail sales figures will only be available a few days before…The other complication is that, if it can’t reach an agreement next week with its creditors to free up the next tranche of its bailout funds, Greece could soon be forced into some form of debt default…yet another reason for the Fed to sit on its hands for a little longer.”

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