December retail sales: Fed rate hikes ‘really impacting goods sectors,’ economist says
Jharonne Martis, Refinitiv Director of Consumer Research, and José Torres, Senior Economist at Interactive Brokers, join Yahoo Finance Live to discuss retail sales, inflation, and the outlook for consumer spending.
Video Transcript
[AUDIO LOGO]
- Well, US retail sales slide 1.1% in December, coming in weaker than economists' expectations, as rising interest rates, elevated inflation, and economic concerns weigh on consumers. Here to discuss is Jharonne Martis, Refinitiv director of consumer research, along with Jose Torres, Interactive Brokers senior economist.
Jose, I want to first start with you and get really your takeaway. So this was a bigger pullback than expected. What stood out to you in this report?
JOSE TORRES: Good morning. Thanks for having me. Well, what stood out for me was the broad weakness across almost all sectors. Only two of the categories notched an increase.
And we're seeing that the interest rate hikes from the Fed are really impacting the goods sectors as well as real estate. When consumers walk into car dealerships or to furniture stores, they find that the interest rates that they have to pay on financing are a lot higher than they were a year or two ago. And, at the same time, banks are also tightening credit standards because they're playing defense due to a possible economic slowdown in 2023.
- And, Jharonne, obviously, some of these more interest rate sensitive segments coming down, anything involving loans, autos, some of these big household purchases. And also gas prices pulling down as well here. When you factor in gas prices, then, how are you viewing this picture of how the US consumer is actually faring?
JHARONNE MARTIS: Well, despite the weakness across the board, year-over-year it was a different story. We saw that the consumers did go out to eat at restaurants. And this is in line with our Refinitiv data that tells us that when consumers go out to eat, we're seeing that fine dining, casual dining are outperforming quick service. So they don't just want to order it and pick it up to take it home. They want to go into the restaurant, sit down, and have an experience despite the higher inflationary prices.
So this comes after being cooped up at home for two years and also underlines the shift that we're seeing consumer behavior, which is that they're moving away from buying things at the mall and instead spending their money for experiences and eating out or traveling.
- So then when you look at some of the declines that we saw that were similar-- nonstore retailers, electronics really contracting at that same pace, between 1.1% and 1.2% there-- are we getting a sense, I say, that this inflation pullback is becoming more broad at this point?
JOSE TORRES: Well, I don't--
JHARONNE MARTIS: Sure, and that's--
JOSE TORRES: Well, I don't think that--
- Jose, I'll have you take that question. And then, Jharonne, you can weight in.
JOSE TORRES: OK. Sure. So services actually, based on the last Consumer Price Index report, core inflation actually accelerated in December from November. So I think it's too early to declare a victory on services just yet.
The labor market remains significantly out of balance, with about 1.8 job openings for every unemployed person. And that's really keeping the pressure on employers to increase wages and keep them high to attract workers in labor-intensive services. So I think that on the goods side, yes, we are having some sharp disinflation.
Commodities, you got to be careful here with the winter, with oil as well as food. Food has been sticky and services as well. So I don't think we're out of the woods yet.
- And, Jharonne, what's your take?
JHARONNE MARTIS: So for the holiday season, the fourth quarter, Refinitiv is looking at a 4.4% growth in revenue. So this is telling us that yes, the consumer did spend somewhat during the holiday season. But given the higher inflationary cost, higher prices, earnings are expected to take a hit. And those are expected to decline 21% for the fourth quarter.
In fact, 10 out of the 11 consumer-related industries have turned negative. And only one is expected to be positive. So, according to Refinitiv, the restaurant, the hotels and leisure sector is expected to be the only positive sector for the fourth quarter. And everybody else is expected to see negative earnings.
- So, Jose, when you factor in what we're seeing not just with consumers, but also what this means for Fed action going forward, how do you see this impacting equity markets going forward?
JOSE TORRES: Well, I think equities are really challenged at the moment. From a fundamental perspective, earnings are expected to contract by our group, like my fellow panelists said earlier. Also technicals, you're running up at that 200-day moving average, as well as that 12-and-1/2-month downward trend line from January 2022.
You also have valuations that are particularly expensive when you compare the equity market to what we're seeing in the fixed-income market, very attractive yields that are investment grade. And for those that want to parse through some of the distressed areas in the high-yield segment, you can actually find some returns that rival traditional equity returns.
And finally, you have the Fed. The Fed understands the lessons of the 1970s and '80s. And they no longer have the disinflationary forces of globally integrated supply chains and low commodity prices helping their effort. They know that as soon as they take their foot off of the monetary policy brakes, there is a significant risk of inflation reaccelerating.
And Chair Powell and his colleagues want to put the inflation genie back in the bottle for good. So I think they're going to stay high for longer, above 5%, and remaining at 5%. Even though they're not raising, that's still restrictive. And I think the market is having a very difficult time understanding that because when I see what the market's pricing in versus the Fed's summary of economic projections, there's a wide discrepancy there.
- And Jharonne, are you seeing this discrepancy? Obviously, a lot of people wondering if the Fed should perhaps take a bit more time and let the medicine take hold as they are looking at some of this lagging data. What are you seeing in terms of how the markets are reacting versus the data points that are coming out?
JHARONNE MARTIS: So we're more focused on the consumer. And our latest Refinitiv Consumer Confidence Report is telling us that going into 2023, consumers are very much concerned about their job security, purchasing power, and future expectations, which is a total difference than what we saw the previous year in 2022. Back then, in the beginning of the year, consumers were very much engaged because they felt secure in their job. And lately, we're seeing that a lot of the tech companies have announced a lot of layoffs.
So if consumers start to see that their inner circle, their group of friends and their families are worried about their job security, they're going to put their hands in their pockets and hold back on spending. This is already being projected in our expectations for earnings. Retailers are also telling us that when consumers come into the store in order-- they have to offer a promotion in order to entice them, in fact, so much so that in a collaboration with StyleSage, we discovered that the discount penetration, the amount of merchandise on sale has gone up significantly. And we're back at prepandemic levels, telling us that unless the consumer sees a promotion or a discount, they really don't want to open up their wallets. They really don't want to spend.
So what you're seeing, then, is there's been a shift in consumer. They don't want to shop at the mall. But if they do, they want to have a promotion. And this is affecting earnings and gross margins for retailers.
- I mean, especially when you factor in the cost of groceries still going up, among everything else, a lot of discretionary spending decisions consumers are having to make. A big thank you to our panel, Jharonne Martis, Refinitiv director of consumer research, along with Jose Torres, Interactive Brokers senior economist. Thank you both this morning.
