As we settle into the rhythm of a new year, we can return to some of the details that will likely drive asset prices this year: economic and corporate fundamentals. As we move toward the inauguration this Friday, the new fiscal policy, including taxes, health care, regulation and spending, will dominate headlines. Keeping an eye on the fundamentals can provide some insight into whether or not the new policies are creating the economic boost that is expected.
Last week, we received some good news about both consumer confidence and retail sales. This information confirmed the fact that consumers are feeling better than they have in a while and are willing to take action with their new-found enthusiasm.
On Friday, we received an update to the University of Michigan Consumer Sentiment survey. It was 6.6% higher than the year before. In particular, consumers were optimistic about future expectations. Even though the index declined slightly from the prior month, it remains near its high. The current conditions measured in the index remain near the highest they have been since 2004.
These optimistic feelings are not uniformly shared, however. The difference between those who believe that government policy will be positive and those who have a negative view has reached a wider level than ever seen, representing the partisan view of future fiscal policy. This is important because the consumer represents two thirds of the economy, and the increase in the sentiment survey suggests that spending will continue to grow at a reasonable rate. The partisan spread in expectations confidence could reduce that overall consumption. It is possible that as the new fiscal policies become clearer, this could abate.
We also received an update regarding retail sales. On the surface, it was a strong report. Sales increased .6% over the month of November. Over the last year, sales grew by 4.1%, the highest annual growth rate in the last twelve months (except for October, which was only a tenth higher). Much of the monthly gain can be attributed to strong auto sales. There was a 2.4% gain in auto sales over the month of November. For the year, light vehicle sales were 18.3 million units—an 11-year high! Strong auto sales are a reflection of consumer sentiment because in order to purchase a big-ticket item like a car, consumers need the confidence of future strong labor markets and wage growth.
The increase in gas prices also lifted gas and convenience store sales by 2% over the prior month.
These strong numbers are in conflict with other retail sales as a result of the move from in-store to on-line sales. Department store sales were actually down by .6%, while non-store retailers enjoyed a 1.3% gain over the prior month. During the last month, large retailers such as Kohl’s and Macy’s have announced a reduction in stores and staffing while Amazon reported another record year for holiday sales.
As mentioned earlier, personal consumption and consumers are responsible for two thirds of the economy. As a result, their views of the future for economic, wage and labor market growth are key to determining whether or not the economy will outperform in 2017.
One of the focal points of the new administration and Congress’ policies is tax reform and reducing the individual tax rate, so information regarding these policies could create enthusiasm among consumers even before the policies are implemented. We will continue to track consumer confidence and retail sales as two indicators of how consumers are feeling about the potential for new fiscal policy.
Because this new policy comes at a time when the unemployment rate is low and wage growth is rising, it is possible that consumer sentiment and consumption could continue to rise even more.