Retail Sales Disappoint Despite Recent Job Gains

We wrote last week about the strong October employment report, where a better than expected 271k jobs were created. It is reasonable to assume that improving employment levels, coupled with the continuation of low gasoline prices, would be a boom to consumer spending. Subpar third quarter earnings reports from major U.S. retailers, along with a weaker than expected retail sales release, don’t seem to justify that assumption, however. Retail sales rose 0.1% in October, less than the 0.3% gain economists were expecting. Macy’s and Nordstrom reported 3Q earnings last week that severely disappointed investors, with both company’s stocks falling sharply after the results were announced. So what gives? From what we can gather, there are two trends in place causing the weakness:

  1. Consumers have shifted their spending habits to focus on electronics, cars and items for the home according to analysts at Nomura Securities. 
  2. U.S. consumers are saving more. As seen in the chart below, the savings rate has ticked up in recent years, which indicates that people are putting the gasoline windfall into savings instead of spending it. The second trend is especially important for the U.S. economy as strong spending is necessary for strong GDP growth. Absent consumers starting to open their wallets, the slow growth environment we’ve become accustomed to may be here to stay. 

Source: Bloomberg, Nomura, WSJ