By
Russ
Koesterich
:
US Consumer: Better, but Long-Term Headwinds
Remain
Last week US retail sales came in well below expectation. While
much of the shortfall could be attributed to autos and gasoline
sales, it was the second month in a row in which retail sales data
disappointed. This is also consistent with the consumption
component in the Q4 GDP print. While the US economy accelerated in
the fourth quarter, the pick-up was not due to a sudden consumer
splurge. US real personal consumption grew at 2% in the fourth
quarter of last year. While this was a modest improvement from Q3,
it was exactly in-line with the average since the recovery began in
mid-2009. In other words, with a few blips along the way, US
consumption growth has been relatively steady at a 2% annualized
rate for the past 10 quarters. This compares poorly with the
long-term average of 3.40%, or even with recent history - 2000 to
2007 when personal consumption grew at an average rate of around
3%.
click to enlarge
This begs the question: Given the recent improvements in the
labor market, why is consumption still so far below trend and when
will it reverse?
It is true that the labor market has improved significantly over
the past few years. While the slow healing is still not evident to
many Americans, by virtually every metric labor conditions have
gotten better. Initial jobless claims have fallen dramatically over
the past eighteen months, from nearly 500,000 a month to around
350,000, the lowest level since 2008. While it is true that the
pace of job creation has lagged previous recoveries, it has
accelerated dramatically in the past two years. Non-farm payrolls
are now growing at 1.50% year-over-year, roughly double the rate of
last August.
However, while the situation has improved it's important to
remember that the improvement is from a very low base. In addition,
while more jobs are being created, this recovery has also been
characterized by more than one idiosyncrasy. First, either due to
natural demographic trends, discouragement, or some combination of
the two, fewer working age individuals are participating in the
work force. While job growth has been accelerating, the drop in the
unemployment rate - from nearly 10% in the fall of 2010 to 8.3%
today - has been helped by the fact that millions of people have
dropped out of the work force. Today, the labor force participation
rate stands at 63.7%, the lowest level since 1983 (see above
chart). While the ageing of the population has contributed to the
drop, poor labor market conditions seem to be accelerating the
process.
The second issue is even more of an obstacle for a consumer
recovery: wages, or the lack thereof. While more people employed
does help raise aggregate consumption power, for many consumers
wages are still falling. Disposable income growth has actually been
decelerating over the past year, from 6% year-over-year growth in
early 2011 to 3.8% today. For hourly workers, the situation is
worse. Despite January's mini surge in job creation, hourly wages
were up just 1.50% from a year earlier, the slowest rate of growth
going back to 1965 (see chart below). After accounting for
inflation, hourly workers have lost roughly 1.50% of purchasing
power over the past year.
Finally, there is the lingering problem of consumer debt. While
household debt has contracted from a peak of 130% of disposable
income in 2007 to 114% today, this is still well above the historic
average and probably unsustainable. To bring household debt back to
its late 1990s level would require much faster income growth or
another $2 trillion to $3 trillion in deleveraging. Either way, it
will take several more years to complete the process of repairing
the consumer balance sheet. During this period, we are skeptical
that consumption will revert back to its long-term trend.
Retail Stocks: What, Me Worry?
Curiously, US retail stocks seem pleasantly undisturbed by any
of the above. Retailers continue to advance, up roughly 7%
year-to-date. This latest surge has pushed valuations up to nearly
19x trailing earnings, a 40% premium to the broader US market.
While this is down slightly from the 43% premium commanded last
September, it is still well above the long-term average of 12%, and
remains curiously close to a 20-year high for relative valuation
(see chart below).
While US retailers have improved their efficiency, along with
the rest of the corporate sector, this modest improvement in ROE
seems insufficient to justify a 40% premium to the overall stock
market.
While we do expect the US jobs market to continue to mend, given
the nature of the recovery it will probably continue to be a slow,
uneven process. In this type of environment, wage growth is likely
to remain anemic and barely keep pace with inflation. Given the
lack of real-wage growth, the overhang of debt, and the growing
dependence of many segments of the population on government
support, we find it hard to justify why investors would pay a big
premium to be leveraged to the US consumer.
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See also
Intel - A Good Company, Not Attractively Priced
on seekingalpha.com