Show Transcript
U.S. retail sales continued to grow in February, setting the first quarter up for another solid gain. Anthony Okolie speaks with Maria Solovieva, Economist, TD Bank, about the latest data and why the risk of higher inflation may still have an impact on U.S. spending.
Print Transcript
[MUSIC PLAYING]
- Even in the face of red hot inflation, US retail sales continue to show signs of resilience. But that's not to say that there aren't challenges ahead when it comes to US consumer demand. With more on this is Maria Solovieva, economist for TD Bank. Maria, given all the concerns about inflation in the US, how is it that retail sales continues to put in a solid showing?
- Well, first of all, thank you, Tony, for having me today. And what I would like to say is that of course, we're seeing that consumers are becoming increasingly more tired about inflation. This is most notable in the University of Michigan's Consumer Sentiment Index, which is now at the lowest point in the last 10 years.
But we shouldn't forget that consumers finished the year of 2021 in a very strong position. The net worth of US households increased 30%. So it's sitting at 30% above the pandemic levels. It's $150 trillion, historical level really.
And we also know that consumers have been able to save a sizable nest egg of approximately $2.7 trillion at the highest. And they hardly tapped into it yet. So there is this resilience in the US consumer, and that's why we see especially retail sales continue to show some strength.
- And it seems that that strength from 2021 was continuing into 2022. January's numbers were revised upwards, and February's results seem to suggest that growth was a little bit more diversified as well. What does that say about the state of the US recovery?
- You're right to say we were quite surprised with the revision in January. In fact, the increase of 0.3% in February looks much more commendable if you consider that the January number was revised. We like to see a little bit more diversification. Maybe it's not so visible in retail sales, which exclude services category and expenditure category.
But we are seeing some of the improvement from the omicron wave. For example the e-commerce category, which is a poster boy of the pandemic, was up 20% in January, but a decline in February which suggests that consumers are now spending on other items. And the good thing that we saw, as well, is the spending at restaurants has been increasing, spending on clothing, which suggests that going out categories are also improving in February.
- OK, let's talk a little bit more about the state of inflation and the long-term implications here. Do you see any signs that inflation is impacting American consumers?
- Indeed, we do see those signs. And retail sales are a bit more difficult to just speak about in the real activities. We try to adjust those for consumer price index by matching different categories with the consumer price index, and what we are seeing that, indeed some of the categories are showing some weakness in real terms if we were to adjust them for inflation.
So some of them are. Again, gas stations which have increased the prices on gas have doubled in the last year. So we see that in real terms consumers spending a little bit less.
We also see this in categories like furniture, and electronic spendings that were also quite strong during the pandemic. And also at grocery stores we saw a decline in February. And what's notable as well for some of those categories we see year on year decline in real spending. And those categories are gas, and electronics, and furniture stores.
- And when you talk about goods you can't not talk about supply chain issues, and that's been an issue in the past. Where are we right now with regards to the supply chain?
- We see some improvement, which is great. Actually if you take stock of inventories, excluding autos, we see an increase of roughly 20% in inventories. And we also see a decline in prices, freight prices, as well as improvement in delivery times for both ISM indices in manufacturing and services.
What we don't see is an improvement in auto sector. That, in fact, still is almost 30% below its pre-pandemic level in terms of inventories. So that's definitely impacting this sector.
- What are some of the other headwinds facing the US economy, and will the decline of the omicron variant be enough of a tailwind to keep the economic momentum going?
- So the decline in omicron is a great development. It's going to help the consumer to transition to services, and we hope for that especially in this second quarter. Let's not forget that we are not back to the pre-pandemic levels in terms of restrictions. So as more restrictions come off because of the decline in the virulence of the virus, then we're going to see, hopefully, a return of the consumer spending on services.
At the same time, what we're likely to see is increasing pressure from inflation. So in our current forecast, we increase the price of the oil. Our forecast went from $72 to $110, which is a sizable increase.
And given that Russia's invasion of Ukraine is continuing, we're going to see the prices being elevated. So that means higher prices at the gas stations. And it's going to probably spill over to food prices, because the war is also affecting commodity prices and food commodities as well. So that will create headwinds to consumer.
So what we are hoping to see is the decline in spending on goods will be offset by increases on spending in services. So we still expect deceleration in the first quarter, potentially decline in the second quarter on goods, which will be offset by acceleration of spending in services. And we are still expecting roughly 2.5% increase in spending in the first half of 2022 in real terms.
- Maria, thank you very much for your time.
- Thank you.
[MUSIC PLAYING]
- Even in the face of red hot inflation, US retail sales continue to show signs of resilience. But that's not to say that there aren't challenges ahead when it comes to US consumer demand. With more on this is Maria Solovieva, economist for TD Bank. Maria, given all the concerns about inflation in the US, how is it that retail sales continues to put in a solid showing?
- Well, first of all, thank you, Tony, for having me today. And what I would like to say is that of course, we're seeing that consumers are becoming increasingly more tired about inflation. This is most notable in the University of Michigan's Consumer Sentiment Index, which is now at the lowest point in the last 10 years.
But we shouldn't forget that consumers finished the year of 2021 in a very strong position. The net worth of US households increased 30%. So it's sitting at 30% above the pandemic levels. It's $150 trillion, historical level really.
And we also know that consumers have been able to save a sizable nest egg of approximately $2.7 trillion at the highest. And they hardly tapped into it yet. So there is this resilience in the US consumer, and that's why we see especially retail sales continue to show some strength.
- And it seems that that strength from 2021 was continuing into 2022. January's numbers were revised upwards, and February's results seem to suggest that growth was a little bit more diversified as well. What does that say about the state of the US recovery?
- You're right to say we were quite surprised with the revision in January. In fact, the increase of 0.3% in February looks much more commendable if you consider that the January number was revised. We like to see a little bit more diversification. Maybe it's not so visible in retail sales, which exclude services category and expenditure category.
But we are seeing some of the improvement from the omicron wave. For example the e-commerce category, which is a poster boy of the pandemic, was up 20% in January, but a decline in February which suggests that consumers are now spending on other items. And the good thing that we saw, as well, is the spending at restaurants has been increasing, spending on clothing, which suggests that going out categories are also improving in February.
- OK, let's talk a little bit more about the state of inflation and the long-term implications here. Do you see any signs that inflation is impacting American consumers?
- Indeed, we do see those signs. And retail sales are a bit more difficult to just speak about in the real activities. We try to adjust those for consumer price index by matching different categories with the consumer price index, and what we are seeing that, indeed some of the categories are showing some weakness in real terms if we were to adjust them for inflation.
So some of them are. Again, gas stations which have increased the prices on gas have doubled in the last year. So we see that in real terms consumers spending a little bit less.
We also see this in categories like furniture, and electronic spendings that were also quite strong during the pandemic. And also at grocery stores we saw a decline in February. And what's notable as well for some of those categories we see year on year decline in real spending. And those categories are gas, and electronics, and furniture stores.
- And when you talk about goods you can't not talk about supply chain issues, and that's been an issue in the past. Where are we right now with regards to the supply chain?
- We see some improvement, which is great. Actually if you take stock of inventories, excluding autos, we see an increase of roughly 20% in inventories. And we also see a decline in prices, freight prices, as well as improvement in delivery times for both ISM indices in manufacturing and services.
What we don't see is an improvement in auto sector. That, in fact, still is almost 30% below its pre-pandemic level in terms of inventories. So that's definitely impacting this sector.
- What are some of the other headwinds facing the US economy, and will the decline of the omicron variant be enough of a tailwind to keep the economic momentum going?
- So the decline in omicron is a great development. It's going to help the consumer to transition to services, and we hope for that especially in this second quarter. Let's not forget that we are not back to the pre-pandemic levels in terms of restrictions. So as more restrictions come off because of the decline in the virulence of the virus, then we're going to see, hopefully, a return of the consumer spending on services.
At the same time, what we're likely to see is increasing pressure from inflation. So in our current forecast, we increase the price of the oil. Our forecast went from $72 to $110, which is a sizable increase.
And given that Russia's invasion of Ukraine is continuing, we're going to see the prices being elevated. So that means higher prices at the gas stations. And it's going to probably spill over to food prices, because the war is also affecting commodity prices and food commodities as well. So that will create headwinds to consumer.
So what we are hoping to see is the decline in spending on goods will be offset by increases on spending in services. So we still expect deceleration in the first quarter, potentially decline in the second quarter on goods, which will be offset by acceleration of spending in services. And we are still expecting roughly 2.5% increase in spending in the first half of 2022 in real terms.
- Maria, thank you very much for your time.
- Thank you.
[MUSIC PLAYING]
