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Americans shrug off the government shutdown and head to the mall

Brent Nyitray, CFA, MBA

Retail sales data gives analysts insight into the strength of the consumer

Consumption is the biggest driver of the U.S. economy and accounts for 70% of GDP. Consumption has been relatively subdued since the recession began, as Americans have boosted their savings rate and spent only on essentials. The real estate bubble drove consumption in the mid-’00s as people took out cash refinances and spent the extracted home equity. This increased the cost basis for many people’s homes and left them vulnerable when house prices collapsed. As a result, they’ve focused more on paying down debt than spending. This de-leveraging process has been going on for a while, but consumers are still indebted.

The Census Bureau releases retail sales data monthly. The report received is the advance retail sales estimate. It’s based on incomplete data. The data is subject to revision, and the final sales data will be released next month.

Advance retail sales come in better than expectations

The headline retail sales number rose 0.4% versus expectations of an increase of only 0.1%. The apparel retailers noticed a weak back-to-school period, which doesn’t bode well for the make-or-break holiday shopping season. Ex-autos, retail sales increased 0.2%. Ex-autos and ex-gasoline sales rose 0.3%. The control group, which strips out some of the more volatile elements, was up 0.4%. This means things are a little better than the headline number suggests.

This is the second data point that suggests the government shutdown didn’t have any real effect on the economy (the first was the October jobs report). It seems like the consumer is weathering the increase in interest rates. So far, it doesn’t appear to have affected spending, but interest rate changes usually take a few months to start showing up in the data.

Implications for homebuilders

Homebuilders are sensitive to the general economy—mainly the job market and interest rates. That said, increases in consumption and sales are likely to forecast better growth ahead for the homebuilders.

Overall, increases in business activity and consumption are starting to drive more business for homebuilders, like Lennar (LEN), KB Home (KBH), Standard Pacific (SPF), Toll Brothers (TOL), and NVR Homes (NVR). Housing starts have been so low for so long that there’s some real pent-up demand that will unleash as the economy improves. The secular (long-term) story for homebuilders is optimistic: household formation numbers will be a real wind at their backs.

The return of the homebuilding sector can set up a real virtuous circle for the economy. A big reason why the recovery has been tepid so far has been the lack of construction, which is a big employer. Historically, homebuilders were the first to recover after a recession—construction and homebuilding usually led the economy out of a recession, which would be evident by a spike in housing starts. This time around, that didn’t happen because of shadow inventory, which meant that economic growth was more tepid during this recovery. But that appears to be changing.

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