Three Reasons Why Retail Sales Are About To Disappoint Bigly

On Friday the Department of Commerce will report August retail sales, a material report which all else equal, may influence whether the Fed proceeds with its plans to unveil balance sheet tapering in its upcoming FOMC meeting. However, as we discussed last week, the report, together with virtually all other high frequency economic reports, will be materially distorted by the destructive aftermath of hurricane Harvey (Irma"s impact will be felt in the September retail report).

While Goldman recently showed the historical impact of hurricanes and other natural disasters on virtually every economic data series...

... of particular interest in the coming days will be the biggest driver behind the US economy, namely retail spending, and specifically whether the recent natural disasters led to a sharp - and potentially sustained - slump. According to internal Bank of America credit and debit card spending data released as usual just days ahead of the official government report, there does appears to be a substantial adverse impact. The question is how much of this is secular, and how much is a continuation of recent weakness in retail spending. Further complicating matters is a seasonal quirk, with the August spending report coming at the peak "back to school" spending period, coupled with the recent Amazon Prime Day which led to further distortions in retail spending patterns.

As BofA"s Michelle Meyer calculates, retail sales ex-autos, as measured by BAC aggregated credit and debit card data, declined 0.1% mom seasonally adjusted in August, leaving the 3-month moving average tracking flat for the month. Consumers shifted spending to gasoline stations, which were up strongly in the month, owing in part to Hurricane Harvey.

After controlling for the increase in gasoline spending, retail sales ex-autos and gasoline declined 0.4%: one of the sharpest declines YTD, and a confirmation of the continuing divergence between BofA (blue line) which has hugged the flatline in recent months, and official government data, which while week, has demonstrated modest Y/Y growth.

According to Bank of America, there are three key factors influencing the data this month:

1. Hurricane Harvey;


2. the pull-forward of retail spending into July by Amazon Prime Day; and


3. back-to-school shopping.

In an attempt to isolate the influence of Hurricane Harvey which made Texas landfall on August 25, BofA first examined daily spending in Texas which shows that spending picked up in the days heading into the hurricane but remained depressed through the event and in the days after, as one would expect.

Meyer explains:

We estimate that the net reduction of spending in Texas sliced 0.1-0.2pp from the monthly growth rate of total retail sales ex-autos in August. We then dug deeper and looked at the impact by the type of spend which reveals that necessary items (food and gasoline) increased in the month while more discretionary items declined (Chart 2). We also measured spending by major region in Texas (MSAs) which shows significant decline in Houston but continued growth in regions not hit by Harvey (Chart 3)

The charts below provide further evidence that Harvey caused a net drag to spending in the areas hit directly. In contrast, there was trend-like growth in MSAs in Texas which were not directly impacted by Harvey.

However, it wasn"t just Harvey explaining the sharp drop in ex-gasoline sales. In addition to the adverse reginal impact from Harvey, August retail sales were also likely held
back by the strong success of Amazon Prime-day in July. BofA data shows that Prime Day pulled forward activity from August into July.

Finally, and perhaps most concerning, the third indication that retail sales are set to disappoint, BofA writes that while it did not find much of a story for the back-to-school season, its proxy for back-to-school sales showed growth of just 2.4% yoy, down more than 50% the 5.4% yoy pace last year.

This is a problem because according to the National Retail Federation"s annual survey, families were projected to spend approximately $29.5bn on back-to-school items which would translate to an 8% yoy increase from the prior year"s spending plans. Unfortunately, those spending plans have not translated to actual spending as expectations have once again overshot spending patterns as they did in 2011 and 2012 but were below in 2013-2015.

Finally, broken down by category, BofA finds that on a % mom basis, consumer spending declined in most categories in August with only food and beverage, gasoline stations and cruise showing an increase. As noted above, spending on food and beverage and gasoline stations likely saw a boost due to Hurricane Harvey as households stocked up on essentials.

BofA"s Bottom line: the weakness in August retail sales, already expected to come in at near stall-speed levels, is likely exaggerated by the hurricane and July prime-day.

The good news is that while Hurricane Irma may depress spending in September, retail sales typically bounce back after a natural disaster, suggesting upside into 4Q. Unless, of course, it forces an even greater decline in spending, as the following charts showing the secular decline in retail sales indicate.

This Recovery Isn't All That Resilient, Here's Why

Authored by Danielle DiMartino Booth via Bloomberg.com,

When adjusted for inflation, credit card usage has grown faster than incomes for 18 months...

Are Federal Reserve stress tests leading economic indicators? That certainly seems to be the case. Just ask Capital One Financial Corp.

As of the first quarter, credit card loss provisions at Capital One were above 5 percent, a six-year high. The company recorded some improvement for the second quarter, yet Fed stress tests of the bank’s overall loan portfolio in a deep downturn show losses topping 12 percent. That explains Capital One’s “conditional” passing score, a black eye that prompted a reduced share buyback plan and no increase in its dividend.

Most economists today applaud the resilience of the current recovery, which has stretched into its eighth year, the third-longest in postwar history. Resilience and rising household defaults, though, don’t tend to go hand in hand.

Pressures have been building in the background for some time. When adjusted for inflation, credit card usage has grown faster than incomes for 18 months. According to Fed data, that time frame coincides with the upturn in revolving credit, a proxy for credit card debt.

In November 2015, outstanding revolving credit crossed above the $900-billion threshold for the first time since December 2009. By May of this year, annual growth was clocking 8.7 percent. Meanwhile, credit card balances hit $1.02 trillion, the highest level in almost eight years.

Whether by choice or force, the aftermath of the financial crisis prompted households to ratchet back their usage of credit cards. As the recovery got underway, frugality prevailed, punctuated by an increase in debit card purchases. It is thus notable that Bank of America data find debit card usage has weakened in recent years as households grew more comfortable rebuilding their credit card balances.

"Confidence" is the term most associated with the rising credit card debt. But it’s fair to ask why confident households would choose to pay so dearly for the privilege. At 15.83 percent, the average rate on credit card balances is at a record high.

It is more likely that households are increasingly tapping their credit cards to cover the cost of necessities, that they are less confident and more anxious about their future finances.

The latest University of Michigan consumer confidence data suggest anxiety is indeed setting in. At 80.2, the expectations component is at the lowest since October and running below the 2016 average of 81.8.

According to the University of Michigan:

The data indicate that hopes for a prolonged period of three percent GDP growth sparked by Trump’s victory have largely vanished, aside from a temporary snap back expected in Q2. The declines recorded are now consistent with just above two percent GDP growth in 2017.

The retail sales report for June corroborates the forecast for continued muted economic growth. In constructing gross domestic product, statisticians net out auto, gasoline and building materials purchases from retail sales to arrive at a "control group." At 2.4 percent, the annual growth rate of the control group has fallen to the lowest since January 2014.

The renewed weakness in consumption prompted the economists at Bank of America Merrill Lynch to reduce their forecast for second-quarter GDP to 1.9 percent. The Atlanta Fed’s GDPNow forecast is a bit higher, at 2.4 percent, but that’s a far cry from the robust 4.3 percent rate anticipated on May 1.

In her recent congressional testimony, Fed Chair Janet Yellen expressed continued optimism for a strong second-quarter rebound in GDP growth. If the Atlanta Fed’s forecast pans out, first half growth will stumble in at a 1.9 percent rate, hardly reflective of accelerating economic activity.

Even the ebullient homebuilders have begun to concede that there could be more than just a supply shortage at the root of the slowing housing market. Pending home sales have fallen for three straight months and are now 1.7 percent below their year-ago level.

The National Association of Realtors acknowledged that “weaker financial and economic confidence could also be playing a role in the slowdown in contract activity.” The NAR added that they had “found that fewer renters think it’s a good time to buy a home, and respondents overall are less confident about the economy and their financial situation than earlier this year.”

With rental inflation running 3.9 percent above its year ago rate and homes priced out of their budgets, renters are effectively trapped in a budgetary vise. Housing costs consume about a third of households’ average budgets and largely dictate consumers’ wherewithal to finance the discretionary purchases that make the consumption-driven U.S. economy hum.

Suffice it to say, when the costs of other necessities such as health care, the food you put on the table, your car payment and mobile-phone bills are also running high, it’s difficult to make ends meet. In a survey conducted by Survata and released in late June, 49 percent of households said they were living paycheck-to-paycheck; six in 10 reported that their rainy-day funds could not cover six months of living expenses.

What’s a household to do under such circumstances? It would appear they’ve had to rely on credit cards. The eventual price tag for the economy remains to be seen and won’t be known until the next recession has come and gone. As for how high the bill will be in the end, its likely Capital One already has that answer.

BofA Finds Surging Consumer Confidence Does Not Result In Higher Spending

While markets are closed tomorrow for Good Friday, the Census Bureau will release both CPI and Retail Sales data at their regularly scheduled times. And since it will be impossible to trade these numbers as they are released, here is a courtesy advance look from Bank of America which as usual has released its internal debt and credit card data in advance of the government report. What it found is that while there has been a slight improvement to the surprisingly poor data from recent months, it is nowhere near what one would expect based on near record consumer confidence surveys.

As BofA"s Michelle Meyer writes, according to the BAC internal card data, consumer spending improved in March relative to the weak pace in February. The bank"s estimate of retail sales ex-autos, derived from the aggregated credit and debit card data, increased at a 0.4% mom seasonally adjusted pace in March - the highest print in nearly a year - even as gasoline prices declined on a seasonally adjusted basis in March. While Meyer notes that this points to "healthy growth in core control retail sales released by the Census Bureau on Friday", she cautions that "the gain may not be quite as strong given that the BAC data had been trending below the Census and was therefore due for a bounce higher."

Furthermore, the monthly pattern has been particularly noisy of late – sales fell sharply in December (-0.9%), rebounded in January (1.6%) but slipped lower in February (-0.1%). There gave been a number of “special factors” which influenced retail sales, including the timing of the Christmas and New Year’s holidays and the delay in tax refunds which likely delayed spending from February to March. Therefore
it is prudent to smooth through the wiggles – on a three-month moving basis, retail sales ex-autos are up 0.6% mom, while retail sales ex-autos are up 4.5%

And while retail sales point to a modest improvement, Meyer writes that the potential rebound is nowhere near close to matching "the dramatic improvement in consumer confidence", which is also Bank of America"s Chart of the month.

To put it into perspective, the Conference Board measure of confidence has reached the highest level since December 2000 while earlier today the University of Michigan hit highest since November of the same year. Putting 2000 in comparison, back then retail sales ex autos were running above 7% yoy and in 2007, about 4% yoy.  BofA"s take:

While we think there are fundamental reasons for higher confidence – low unemployment rate, increasing wage growth, low borrowing costs and solid stock market performance – we believe that part of the increase in confidence reflects expectations for fiscal stimulus. In our view, there is a rocky road ahead for tax reform which we believe could trigger a partial reversal in confidence. Meanwhile, we expect actual spending to continue to grow at only a moderate pace.

It also means that, as cautioned here repeatedly, the soft data has now plateaued, and is rushing to converge with the "hard" data to the downside.

Some other observations:

don"t expect a sharp rebound in northeast spending.

• The Northeast was hit by a blizzard during the week of March 12th, dropping several feet of snow in parts of the region.


• We can see the impact of the storm in our card data. We find that card spending in the Northeast exceeded the rest of the country in the days heading into the storm as households presumably stocked up with necessities in preparation.


• This was offset by a meaningful drop in card activity during the storm. On balance, we estimate that the blizzard served as a very slight drag on overall spending in the month

Restaurant spending remains recessionary

• Spending growth at restaurants has generally been on a downward trajectory, increasing only 3.2% yoy in March.


• Part of this weakness reflects difficult year-over-year comparatives. As you can see from the month-over-month changes, spending at restaurants is still increasing on a sequential basis, but at a slower pace than last year.


• There was also an unusual swing at the turn of the year where spending was down sharply in December but climbed higher in January. We suspect this may reflect the timing of Christmas Eve and New Year’s Eve which both fell on Saturdays, therefore distorting the typical weekly spending patterns.

Finally, 4 more charts showing that whether it tracks confidence or not, the US consumer has seen far better days.

Barclays Server Crash Leaves Customers Unble To Withdraw Cash, Use Debit Cards

Having managed to stem its recent earnings rout, reporting a Q4 rebound in income from continuing operations which rose to £380 million after reporting a loss of £2.24 billion a year ago, UK"s Barclays is facing a more traditional problem: on Saturday Barclays customers have reported problems using their cards in shops and withdrawing money from some cash machines according to the BBC.

Barclays customers tweeted about problems using their cards when out shopping or trying to access online banking on Saturday afternoon. "Wondered why my card was declined when paying for lunch. Barclays servers have crashed. Brilliant," said one customer, James. Other echoed his sentiments.

Major problem with Barclays Bank as their server is down effecting all branches nationwide!

— Jason Endress (@JasonEndress) February 25, 2017

Barclays are having a major server issue - all card transactions are being declined and you can"t use ATM"s either #nightmare

— Tammy Lei (@xtlhx) February 25, 2017

According to the BBC, The bank said it was "working to fix" a problem and advised customers to use other banks" cash machines. It added that telephone banking and in-branch payments were also affected and apologised "for any inconvenience".

We’re still experiencing issues affecting Barclays Debit Card and ATM transactions. Our teams are working to get this restored.

— Barclays UK (@BarclaysUK) February 25, 2017

It is not yet known how many of Barclays" 15 million card customers have been affected by the problems. In a tweet, the bank said: "We"re still experiencing issues affecting Barclays Debit Card and ATM transactions. Our teams are working to get this restored." Barclays added: "Technical issues are affecting some digital services. We"re investigating this and apologise for any inconvenience."

Technical issues are affecting some digital services. We"re investigating this and apologise for any inconvenience.

— Barclays UK (@BarclaysUK) February 25, 2017

This is the latest in a series of technical "glitches" to hit the bank recently. Today"s problems come months after thousands of Barclays customers in the north of the UK had payments wrongly taken from their accounts. Last October, Barclays said customers were refunded after they had duplicate debit card payments taken.

An amusing, if accurate comment following the news, highlights just how "safe" one"s cash held in the bank is these days:

@zerohedge seems like money these days is backed by the "full faith and credit" of an institutions IT dept

— StockCats (@StockCats) February 25, 2017

The Other 'Ban' That Was Quietly Announced Last Week

Submitted by Simon Black via SovereignMan.com,

Most of the world is in an uproar right now over the travel ban that Donald Trump hastily imposed late last week on citizens of seven predominantly Muslim countries.

But there was another ban that was quietly proposed last week, and this one has far wider implications: a ban on cash.

The European Union’s primary executive authority, known as the European Commission, issued a “Road Map” last week to initiate continent-wide legislation against cash.

There are already a number of anti-cash legislative measures that have been passed in individual European member states.

In France, for example, it’s illegal to make purchases of more than 1,000 euros in cash.

And any cash deposit or withdrawal to/from a French bank account exceeding 10,000 euros within a single month must be reported to the authorities.

Italy banned cash payments above 1,000 euros back in 2011; Spain has banned cash payments in excess of 2,500 euros.

And the European Central Bank announced last year that it would stop production of 500-euro notes, which will eventually phase them out altogether.

But apparently these disparate rules don’t go far enough.

According to the Commission, the presence of cash controls in some EU countries, coupled with the lack of cash controls in other EU countries, creates loopholes for criminals and terrorists.

So that’s why the European Commission is now working to standardize a ban on cash, or at least implement severe restrictions and reporting, across the entire EU.

The Commission’s roadmap indicates that forthcoming legislation, likely to be enacted next year.

This is happening. And it may serve as the perfect case study for the rest of the world.

A growing bandwagon of academics and policy makers in other countries, including the United States, UK, Australia, etc. has been calling for prohibitions against cash.

It’s always the same song: cash is a tool for criminals and terrorists.

Harvard economist Ken Rogoff is a leading voice in the War on Cash; his new book The Curse of Cash claims that physical currency makes the world less safe.

Rogoff further states “all that cash” is being used for “tax evasion, corruption, terrorism, the drug trade, human trafficking. . .”

Wow. Sounds pretty grim.

Apparently pulling out a $5 bill to tip your valet makes you a member of ISIS now.

Of course, this is total nonsense.

A recent Gallup poll from last year shows that a healthy 24% of Americans still use cash to make all or most of their purchases, compared to the other options like debit cards, credit cards, checks, bank transfers, PayPal, etc.

And the Federal Reserve Bank of San Francisco released a ton of data late last year showing that:

• 52% of grocery purchases, along with personal care products, are made in cash


• 62% of purchases up to $10 are made in cash


• But even at much higher amounts over $100, nearly 1 in 5 purchases are still made using physical cash

This doesn’t sound life nefarious criminal activity to me.

It seems that perfectly normal, law-abiding citizens still use cash on a regular basis.

But that doesn’t seem to matter.

A bunch of university professors who have probably never been within 1,000 miles of ISIS think that a ban on cash would make us all safer from terrorists.

You probably recall the horrible Christmas attack in Berlin last month in which a Tunisian man drove a truck through a crowded pedestrian mall, killing 12 people.

Well, the attacker was found with 1,000 euros in cash.

The logic, therefore, is to ban cash.

I’m sure he was also found wearing pants. Perhaps we should ban those too.

This idea that criminals and terrorists only deal in bricks of cash is a pathetic fantasy regurgitated by the serially uninformed.

I learned this first hand, years ago, when I was an intelligence officer in the Middle East: criminals and terrorists don’t need to rely on cash.

The 9/11 attackers spent months living in the United States, and they routinely used bank accounts, credit cards, and traveler’s checks to finance themselves.

And both criminal organizations and terrorist networks have access to a multitude of funding options from legitimate businesses and charities, along with access to a highly developed internal system of credit.

A cash ban wouldn’t have prevented 9/11, nor would it have prevented the Berlin Christmas attack.

What cash controls do affect, however, are the financial options of law-abiding people.

These policymakers and academics acknowledge that banning cash would reduce consumers’ financial privacy. And that’s true.

But they’re totally missing the point. Cash isn’t about privacy.

It’s one of the only remaining options in a financial system that has gone totally crazy.

Especially in Europe, where interest rates are negative and many banks are on the verge of collapse, cash is a protective shelter in a storm of chaos.

Think about it: every time you make a deposit at your bank, that savings no longer belongs to you. It’s now the bank’s money. It’s their asset, not yours.

You become an unsecured creditor of the bank with nothing more than a claim on their balance sheet, beholden to all the stupidity and shenanigans that they have a history of perpetrating.

Banks never miss an opportunity to prove to the rest of the world that they do not deserve the trust that we place in them.

And for now, anyone who wishes to divorce themselves from these consequences can simply withdraw a portion of their savings and hold cash.

Cash means there is no middleman standing between you and your savings.

Banning it, for any reason, destroys this option and subjects every consumer to the whims of a financial system that is stacked against us.

Do you have a Plan B?

BofA Finds Consumer Spending Tumbled In December, Warns Of Disappointing Retail Sales

With this week"s most important economic data point - this Friday"s retail sales - fast approaching, economists are keen for clues if this key datapoint giving insight into the health of the US consumer will maintain the recent outsized spike in favorable and better than expected economic data, or if adversely, it may be a downward inflection point which could have significant implications on the dollar trade as RBC explained earlier. And according to BofA"s internal debit and credit card data, always released just ahead of the retail sales report, it looks like it will be the latter.

As Bank of America"s chief US economist Michelle Meyer reports, the aggregated BAC credit and debit card data showed that retail sales ex-autos declined 1.0% mom seasonally adjusted in December. "This contrasts with other indicators of consumer strength including reports of a robust holiday shopping season, a rebound in consumer confidence and strong autos sales" according to Meyer.

Actually, based on earnings reports of those companies who have recently closed their quarter, a weak December is precisely what one should expect, further corroborated by JPM"s satellite imagery at early December showing empty parking lots (recall: "Satellite Imagery Reveals Sharp Retail Spending Slowdown After The Election") and a plunge in brick and mortar sales, which has been greater than the offsetting pick up in online sales.

This is how the bank"s adjusted retail spending data looks when charted.

As BofA notes, "the BAC aggregated card data showed that retail sales exautos declined 1.0% mom SA in December. This reversed the strong gains over the prior few months, leaving the 3- month average growth rate to slow."

Amusingly, while in the past everyone ignored seasonal adjustments when it comes to retail sales (a reconciliation which as we have shown on various occasions, would always undermine the adjusted data), this time it is BofA which tries to justify the weakness with seasonal adjustments. This is how it "justifies" the sharp drop in data:

We think the explanation is that our BAC aggregated card data is biased lower due to our seasonal adjustment process. Note that the Census Bureau uses a similar approach, and therefore, we expect their data to be subject to a similar downward bias.

The two major holidays in December — Christmas and the New Year — are fixed in terms of the date but not in terms of the day of the week. This year, Christmas Eve and New Year’s Eve both fell on Saturdays. Spending on those dates was much weaker than on a typical Saturday, presumably since people were enjoying the holidays. However, the seasonal adjustment process treated these days like any other Saturday. This suggests that the adjustment process “over-fits” the data and biases the seasonally adjusted figures lower.

We think the bias in December should correct in January, translating to strong growth in January. A strong gain in January would support our view that the weakness we are seeing in the data is simply “noise”. However, that means waiting until February 15th for the January data to provide confirmation.

Unless, of course, January data does not rebound, in which case that bank"s economists can simply blame the "abnormally cold weather" for the lack of spending, as they have every time over the past three years.  Even so, with that caveat in mind, BofA warns, "since the Census Bureau uses a comparable approach, we think it is prudent to prepare for a similarly negative number in Friday"s report."

And while the December, or even January, data may surprise to the up, or downside, due to quirks in seasonal adjustments, reporting, one thing is undisputable: long-term spending trends, especially when it comes to goods and products, continue to deteriorate. Here"s BofA:

• The sector data suggests that consumers continue to spend on experiences, with airlines and lodging spending up impressively over the prior three months. Presumably, consumers are taking trips around the holidays.


• On the flipside, consumers appear to be spending less on goods, with particular weakness in electronics spending, home goods, and clothing. As we also show in Chart 6, spending at restaurants continues to weaken.

Also, as a result of surging gasoline prices, spending at gasoline stations is rebounding but only due to nominal spending increases. Which means less disposable income available to be spent on other potential purchases. 

And here is the evidence:

Restaurant spending is tumbling

Furniture and home improvement spending has flatlined

Spending on young adult clothing has tumbled.

Spending at food and beverage stores is growing at the lowest rate in 5 years.

And finally, luxury spending - that traditionally reserves to the upper middle and higher classes- continues to crash.

So aside from all that, the consumer is doing great.