Let's zoom out for a second and put all of the excitement about this morning's strong retail sales report in context.
1) We are already in a manufacturing recession. U.S. industrial production broadly--one of the NBER's recession indicators--peaked in October, while manufacturing actually peaked almost a year ago, last April.
2) "Real" consumer spending--another recession indicator--also peaked in October, and it's unclear if the retail sales report this morning would be strong enough to push us to new highs. Remember, retail sales is a narrower consumer gauge that focuses more on spending at stores, restaurants, and e-commerce (and it's also not inflation-adjusted). The January strength simply offsets the November and December weakness we saw. Morgan Stanley, for instance, boosted their first-quarter GDP estimate to a whopping 0.7% from 0.5% after the release. The Conference Board estimate was still at negative 0.5% yesterday, as their chief economist told us, prior to this report.
3) Today's report has some seasonal quirks. January retail sales typically slump 20% from December, but this year only fell 16% (in part because December itself wasn't as strong as usual), so the seasonal adjustments give the headline result a big boost, as Morgan Stanley notes. Warm weather looks to have given restaurant spend an additional boost that's unusual for this time of year. Bottom line, we need another month or two of data to smooth these patterns out.
4) If you take the "strong consumer, 'no landing'" thesis and run with it as a result of the stronger January data we've been getting, just know that you're betting on a nearly unprecedented situation. Can we really be in a production recession--a prolonged one already--without an employment recession following?
There is a consensus forming around the idea that "labor hoarding" by firms who struggled to hire during the pandemic will help keep us from slipping into a larger downturn. Perhaps. But even if firms do cling onto their costlier workers as revenues slow (as we know from slowing nominal GDP growth), then their profit margins erode, which then forces layoffs anyhow at a slight lag, as Aneta Markowska of Jefferies has warned.
Meanwhile, the markets are in such a hawkish mood that they're pushing up bond yields across the board. Yesterday, you could get a 5% yield on six-month Treasury bills; today, you can get that on one-year notes as well. A couple years ago, people were passing around hot crypto trades; today, it's hey, did you know Interactive Brokers has a 4% high-yield cash account?? If everything's so great, would we really find these offers so appealing?
See you at 1 p.m!
Kelly
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