December 9, 2023

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Retailers Will Signal Health of the Consumer Economy This Week Along With Housing Data | Economy

If you want to know the health of the U.S. economy, check out the earnings reports on Tuesday and Wednesday from Walmart and Target.

The results will tell a lot about the spending behavior of the American consumer, who powers nearly 70% of the economy. An official take will come from the Census Bureau when it releases the monthly report on retail sales for October on Wednesday.

Economists are expecting a 1% gain in retail sales for October following no change in the prior month. The reading will reflect sales leading up to the critical holiday shopping period, which kicks off next week with Thanksgiving.

“Consumers are unlikely to pull back on discretionary spending until they are forced to,” according to Mike Graziano, consumer products senior analyst at RSM US. “With more than $1 trillion in excess savings in real dollars, consumers have the cash on hand to spend throughout the holiday season if they choose to.”

Graziano adds that the drop in gas prices since the summer’s peak of $5 a gallon to near $3.50 now “is akin to a cash stimulus for consumers who dipped into savings over the summer to pay for fuel. Lower prices at the pump will benefit lower income tiers and provide the resources for more spending on discretionary desires.”

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The consumer is also getting a psychological boost from news last week that the government’s official gauge of consumer inflation dropped to an annual rate of 7.7% last month after peaking at 9.1% in June. But higher interest rates are cutting into spending on homes and other large items that require financing.

And the Federal Reserve is hardly done with its campaign to snuff out inflation through hikes in interest rates, although the lower-than-expected reading of the consumer price index for October is leading some to predict the central bank may ease up slightly when it meets in December.

“Excluding food, shelter, energy, and used vehicles, year-on-year inflation remains at 6.3%” Joseph Politano wrote in his email newsletter Apricitas Economics last week. “This metric has slowed significantly over the last few months but remains relatively high – on an annualized basis, it has increased 5.3% over the last three months.”

“Since it exemplifies many of the cyclical inflation components that the Federal Reserve theoretically has more control over, its high growth rate is likely disheartening to (Fed) officials – and is part of the reason they aren’t letting up on rate hikes yet,” Politano added.

One place where the Fed’s anti-inflation moves have had a direct effect is on the housing sector. Mortgage rates dipped last week following the release of the inflation data but are still in the middle 6% range for a 30-year fixed rate loan, or double what they were a year ago.

That has cut into sales, down by about a third from a year ago, but so far prices have stopped rising as fast as they did rather than there being a wholesale drop.

National Association of Realtors Chief Economist Lawrence Yun said last week he expects home sales to fall next year by 7% nationally, but the median home price will increase by 1% as tight inventories prevent the type of crash seen during the financial crisis of 2007 to 2009.

“Housing inventory is about a quarter of what it was in 2008,” Yun said. “Distressed property sales are almost non-existent, at just 2%, and nowhere near the 30% mark seen during the housing crash. Short sales are almost impossible because of the significant price appreciation of the last two years.”

Yun also foresees the sector rebounding in 2024, with a 10% rise in sales and a 5% increase in prices.

This week will bring reports on new home construction, with building permits projected to fall by 3.1% from last month and starts to drop by 1.9%.