Retail sales: ‘We haven’t even seen the real onset’ of strong holiday spending, economist says

Joe Brusuelas, Chief Economist at RSM, joins Yahoo Finance Live to discuss retail sales amid the holiday shopping season and the impact of inflation on sale prices.

Video Transcript

JULIE HYMAN: Let's bring in someone else to talk about all of this, someone who pays a lot of attention to this day in and day out. That's Joe Brusuelas, RSM chief economist. Joe, it's great to see you this morning. Man, that retail sales number is an interesting one, right?

And I think in addition to some of the elements that Emily talked about, there's also the question of whether buying was pulled forward, even into October to some extent, by all of these warnings, A, that people weren't going to be able to get stuff they wanted, and, B, that prices were going to keep going up. But what do you think is going on here?

JOE BRUSUELAS: OK, so there's a lot of noise in that report. And I'm in the camp that once you opened up the hood and looked at the engine, what you saw was pretty strong upward revisions back not just October but into September.

You know, in the October income data, the BEA found an extra $220 billion in wages and income. But household's pretty flush right now. And I think that what we saw was a pulling forward of spending because of rampant rumors about, there was going to be broad shortages of goods around the holidays.

Now, that's clearly not the case. Anybody who's gone to, say, a Best Buy, well, all you see are just boxes and boxes of electronics equipment. In fact, what I see are some sales to move those equipment.

Moreover, if you take a look at, say, something like the three-month average annualized pace, which smooths out the monthly, month-to-month noise, retail sales is up 9.3% top line and 10.5% in the control group. Now, that's the one that feeds into how they calculate GDP.

And this is why economists like myself think that we're going to have a pretty strong close to the year. I'm at 7.2% on GDP with upside risk. And we haven't even seen the real onset of what I consider to be very strong holiday spending that we can clearly see in front of us.

So my sense is the American consumer's in good shape. They're spending. We're going to have a very strong close of the year. And to be honest with you, I think we are beginning to see some damping of that because of rising prices.

That 1.7% increase in sales at gasoline stations certainly caught my eye. And that's why we're going to get that policy shift out of the Fed at 2 o'clock Eastern this morning-- or sorry, 2 o'clock Eastern this afternoon, where they're going to pull forward the pace of tapering. They're going to wrap that up in March.

And I expect that, you know, a majority of the committee-- or the majority of the Fed participants are going to be saying, yep, we're going to be hiking rates probably starting in the middle of '22. But I haven't taken March off the table yet. That's going to be in play given the rate of inflation.

BRIAN SOZZI: And when the Fed announces the start of that tapering program later today, does the clock start ticking on a recession?

JOE BRUSUELAS: No, not at all. See, one of the problems, in my estimation, with the sort of 0-1 mentality that we have in financial markets is that if the Fed's not accommodative, then it's going to make a policy mistake.

Let's assume that the Fed hikes rates twice in the middle of next year. You still have a real policy rate that's going to be negative. Real rates are going to be supportive. And Fed policy will remain accommodative for some time, even if it's not buying mortgage-backed securities and treasuries.

So I think that what we're doing is we're setting ourselves up for something of a false dichotomy here and somewhat of a misleading discussion around where policy is, where it's going, and the underlying strength in the economy. And I got to tell you guys, I've been out traveling the last couple of months. I'm getting around the country. I haven't seen the economy in two years the way I've been able to over the last 90 days.

The economy's booming, people. Things are going quite well. That unemployment rate is going to have a three handle on it quite quickly. And like I said, American households are flush with cash. There's over $2.5 trillion in excess savings sitting around. That's helping American households absorb the shock of higher prices.

And my sense is when we get at this time next year, we'll look back. And we'll probably think, hm, maybe we shouldn't have had the great inflation panic or discussion around that panic in the way we did. Things are getting better.

JULIE HYMAN: Well, things are getting better. But I think it's tough to say, let's not have the inflation panic, because people are seeing that, right? That's something that I think is emotional as much as anything else. Joe, has inflation peaked, then? Is this as bad as it's going to get, those November numbers that we saw?

JOE BRUSUELAS: So when I look at the inflation data, Julie, what I see is that roughly 60% of what's driving inflation is clustered in about 30% of the index. And they're in highly volatile categories. In those categories that's been driving inflation, those are likely-- those have likely peaked.

Now, what I'm looking at much more closely is the condition of pricing in the shelter and housing category in general and what's called the owner's equivalent rent in particular. That tends to be a little bit more sticky. And that's going to be more of a medium-term challenge, I think.

My sense is that inflation in terms of the top-line number will probably peak in February. And then you'll see some sharp drops on a year-over-year basis into the spring and summer. And we'll have a three handle on the top-line CPI by this time next year.

I don't personally think that's much to worry about. That's not a problem. In fact, given the broad demographic changes we've got in front of us, the pace of technological innovation, and some of the policy around immigration, I'm more worried about disinflation over the longer period.

So having a little bit of inflation, which is what the Fed's wanted for a long time, is somewhat of a relief. But I do acknowledge that people who are in lower-income households are having a really tough time, especially around gasoline prices. And you know, when the public talks about inflation, that's what they're really talking about, is gasoline prices.

Now, fortunately those are poised to fall if you take a look at wholesale gasoline futures. They're pointing towards a greater than 10% decline. And we'll see that in January and February. But for now, people are rightly upset about inflation even if we're not having what I would call an honest discussion around that some days.

BRIAN SOZZI: Joe, if things are picking up around the country like you have seen, I mean, do you think we finally get a few blow-out jobs reports next year? Because that just didn't happen this year, especially the past few months.

JOE BRUSUELAS: Well, no, I would disagree [INAUDIBLE] jobs reports over the past six months that had one million people seeing an increase in jobs. And that's in the-- that's in the establishment survey. If you're growing by half a million on an average pace, which is largely what we've seen over the past three to six months, you're doing quite well. The unemployment rate's going to fall below 4% here.

My sense is that people are coming back to work. Moreover, if you take a look at that household survey, which really does a good job at looking at broader demographics, what did we see? A million new jobs generated in the household. OK, 549,000 people re-entered the workforce last month.

So what does that tell me? More income in households. Moreover, we're going to get the benchmark revision next month on that, Brian. I suspect that what we're going to see once we get that data, a lot more people have been working than what the top-line data has indicated, and the economy is in a much better space.

Now, this often happens when you're coming out of recessions, especially deep ones. The official data tends to lag what's happening in the real economy. And you tend to get these big, upward revisions.

And let's be honest about this. What have we seen over the past six months? Every time we get a new jobs report, it tends to tell us that the last month or the month before actually was a lot better than what we first thought.

Now, because we trade off the number that comes out, that doesn't get enough discussion. But when you're an economist, you're not so worried about where the day trading's going on. You're worried about the rate of growth, the number of people working, income in the system, and of course inflation. And right now, despite those challenges around pricing, things are incredibly robust. And I would characterize what's going on now as a boom.

JULIE HYMAN: [SIGHS] Nice, little optimism here this morning, Joe. Good to see you, Joe Brusuelas. If we don't talk to you, have a wonderful holiday season. Happy new year. We'll see you soon.