Summary
- Headlines are currently focused on 2016 presidential election.
- What is being missed is a slipping US economy.
- Economic growth, jobs, retail sales are stalling.
The 2016 presidential election is turning into a media circus with the US voter glued to their televisions and smartphones. The first presidential debate drew a crowd of over 84 million viewers, setting a new record in the sixty-year history of televised presidential debates. Between Trump scandals and Clinton e-mail leaks, there is a lot grabbing the attention of the country while, under the radar, the world's largest economy is slowly slipping into a state of mild stagflation.
For example, in 2013, US real GDP averaged 2.68%; it then slowed to 2.53% in 2014 before finally falling even lower to 1.88% in 2015. So far, this year, real GDP has averaged 1.1%, continuing the trend of declining growth, and is at risk of falling below 1.0% in 2017.
The Atlanta Fed recently cut its Q3 real GDP forecast to 1.9%, which, if it turns out to be correct, would mark the fifth consecutive quarter of sub-2% growth, an event not seen since the 2009 recession.
This trend in slowing economic growth is also visible in the payroll data. Monthly payrolls averaged 251K in 2014, 229K in 2015, and have slowed to 178K so far this year.
Where we have seen growth, however, is inflation. When looking at the Consumer Price Index (CPI), the US economy experienced a minor bout of deflation in 2015 but inflation has picked up since, coming in at 1.1% currently (on an annualized basis), and is likely to rise even further with the rise in oil prices.
A rising inflationary trend in the face of a slowing economy (as measured by GDP and employment) is leading to a mild stagflationary environment that does not bode well for the US consumer or businesses.
The elephant in the room is the US consumer, which, accounting for over two-thirds of economic growth, plays the most significant role in the economy and its future prospects. So what is the state of the US consumer today? Not good.
One of the most watched private indicators regarding consumer spending and retail sales is provided by Redbook Research. According to their data, same-store sales growth averaged between 3-5% during the current economic expansion but has now slipped to nearly 0% on an annual basis. This warrants our attention because, as you can see below, it never fell into negative territory in the 2001 recession and only turned negative in the last recession after it was already half over.
Confirming the message from Redbook same-store sales growth is the decline in adjusted retail sales for major store categories. It has now turned negative, an event not seen since the last recession (second panel below, recessions shown in red).
Source: Bloomberg
With retail sales slipping, it's no wonder that there are about 2,500 store closings taking place across the US. Some of this is due to growth in internet sales and not purely from slowing consumption patterns, but a closed store still means fewer jobs and fewer jobs means lower aggregate income and thus lower spending trends. Here's a list of 14 major US retailers each closing down at least 100 stores (source):
- Aeropostale - 113 store closings
- American Eagle - 150 stores over three years
- Chicos - 120 stores between fiscal 2015 and 2017
- The Children's Place - 200 stores between 2015 and 2017
- Finish Line - 150 stores by 2020
- Hancock Fabrics - 255 stores (all stores, filed for Chapter 11 bankruptcy)
- Macy's - 100 stores
- Men's Warehouse/Jos. A. Bank - 250 stores
- Office Depot/Office Max - 400 stores
- Sears & Kmart - 142 stores
- Sports Authority - 140 (all stores, filed for Chapter 11 bankruptcy)
- Walgreens - 200 stores between 2015 and 2017
- Walmart - 154 stores
- Wolverine World Wide - 100 stores
Store closings are not only occurring in general merchandise and apparel but the restaurant industry is also going through hard times as a recent Wall Street Journal article highlights.
Restaurant Chains Get Burned by Overexpansion, New Rivals (10/16/2016)
With the economy slipping, it's no wonder why confidence is also. Whether we look at businesses or consumers, we are seeing fraying around the edges. The National Federation of Independent Business (NFIB), which surveys small businesses, shows optimism has slipped three months in a row as it continues its downward trend that has been in place since late 2014. We also just received October's University of Michigan's Consumer Sentiment Survey, which fell to its lowest level in a year and marked its fourth decline in the last five months.
While the current presidential election is getting all of the attention, my bet is the US economy will likely return to front page news next month given the deterioration underway. If these trends continue, consumer spending this holiday season (or lack of) could mark an important turning point for the world's largest economy.
Upcoming Strategy Meeting
A slowing economy amid eroding business and consumer confidence all point to being in the latter phase of the business cycle, a topic we will be covering in our upcoming Investment Strategy Conference later this month. Come join us to hear our full investment and economic outlook, including the strategies we'll be discussing, as risk management, we believe, will become paramount in the months ahead. Click here for more information
