In September 2011, US headline retail sales rose by a very encouraging 1.1%m/m. The market was expecting a rise of 0.7%m/m. The previous month’s data was revised higher from an initial 0.0%m/m to +0.3%m/m. On an annual basis, US retail sales was up a very respectable 7.9%y/y (in nominal terms).
NB all the retail sales data is measured in nominal terms, and US inflation has increased recently, so the improvement is, to some extent, over-stated.
If motor sales are excluded, retail sales rose by a healthy 0.6%m/m. This was also above expectations, which was for a rise of 0.3%m/m, plus the previous month’s data was revised higher to 0.5%m/m from an initial 0.1%m/m. In addition, if vehicle and gasoline sales are excluded (ie core retail sales), retail spending was up 0.5%m/m, above expectations for a rise of 0.4%m/m, while the August number was revised equally higher (see chart attached on core retail activity). On an annual basis, core retail spending recorded a growth rate of 6.0% - not much wrong with that!
Overall, the US household sector is actually in better financial shape now than a year ago (lower debt/income ratio, lower debt servicing costs, improved savings etc), and consumer income has recorded a meaningful improvement since the Great Recession.
The momentum in the rate of growth of consumer activity slowed recently, especially during the months April 2011 to July 2011 (we discussed the reasons for this slowdown in previous economic updates), leading many to forecast a US recession in Q3/Q4 2011. Since then the US data has improved, including non-farm payrolls, vehicle sales and retail sales. Hence many analysts have actually revised up their short-term forecast for the US economy, arguing that they got too pessimistic about the US economy during the middle of the year. This latest retail sales reading will most likely lead to more upward revisions to Q3/Q4 forecasts.
However, the economic analysis needs to focus on the prospects for the US economy in 2012, and clearly there remains a significant risk that the US returns to recession conditions during 2012 – despite the latest improvement in the economic data. While a US recession in 2012 is currently not our base case, that probability remains relative high and we will continue to closely monitor the situation.
In order to avoid a return to recession conditions the US economy needs to continue to create jobs, especially in the private sector.
Lastly, the chances that the US economy experiences a recession in 2012 increases significantly if the current financial/fiscal/banking difficulties in the Euro-area are not adequately resolved in the coming months, and if there is, in particular, a disorderly default in Greece and/or an uncontrolled Euro-area banking (liquidity or solvency) crisis. The leaders in the Euro-area are currently working on trying to announce and then start to implement a comprehensive support package for the Euro-area. The key meetings in the Euro-area over the coming weeks will be paramount to stabilizing the Euro-area’s financial and fiscal position.
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