Recessions are caused by one thing: a drop in consumer spending which makes up around 80% of U.S. GDP. So today’s big decline in retail sales is a cause of concern…
Retail sales for January were expected to drop 0.4%. The actual number was 0.9%. Now, a 0.9% drop in retail sales for one month isn’t good, but it isn’t that big of a deal. However, if it keeps up for a year, there’d be a 10.8% bite out of the U.S. economy. That would qualify as a big deal.
I ran across a couple of charts on the internet (from the good people at BeSpoke Investments) that paint an interesting picture of spending.
There was a brief spike in Building Materials during the pandemic. But it’s been mostly downhill since the Great Financial Crisis…
And if people are not spending money to fix up their house, stands to reason new furniture is not a priority:
Too lazy for sports? Or maybe everyone’s jogging or going to the gym these days? Either way, they aren't buy sporting goods:
Screw it, I’m going out for a beer:
In terms of the percentage of retail sales since 2022, you could certainly say that the decline for the first three categories has been made up for by the increase in the Bar/Restaurant segment.
Inflation and Spending
We got some upside surprises for January inflation data. Both the Consumer Price Index (CPI) and the Producer Price Index (PPI) came in worse than expected.
Here’s the problem: if the same number of goods are purchased at a higher price, the retail sales would be higher. But spending fell, even as prices rose, meaning that fewer goods were purchased.
This table from the New York Fed shows that consumer debt (credit cards and auto loans) is rising fast, and so are delinquencies for the same categories:
I guess maybe when you max out your credit card, you turn to a Buy-Now-Pay-Later lender like Affirm (NASDAQ: AFFRM):
Its recent earnings report was a blowout for revenue. Investors love the fact that Affirm is lending so much to indebted consumers. However, analysts don’t expect Affirm to have any actual earnings for the balance of fiscal 2025 or fiscal 2026 – which seems like maybe a bad sign. Affirm is valued at $25 billion, what could possibly go wrong?
A Shock to the System
The upshot is that the U.S. economy is very unlikely to just slide into a recession. That’s not how it works. Or I should say, that’s not how it has worked in the past…
Recessions are caused by a drop in consumer spending. Furthermore, It takes a real shock to the American economic system that results in a spike in unemployment to get a prolonged decline for spending.
Predicting shocks to the economic system is not a very sound business model. The whole reason they are called “shocks” is because they are notoriously hard to predict.
Still, falling spending, stubborn inflation, rising debt, and delinquencies mean that the American economy is more vulnerable to a shock right now.
Cheers,
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
You Might Also Like:
An Oldie but a Goodie
https://www.outsiderclub.com/the-bank-of-starbucks/
A Copper Trade
https://www.outsiderclub.com/the-bank-of-starbucks/
The Truth is Out There
https://www.outsiderclub.com/finally-a-ufo-etf/
