Retail Sales in U.S. Increase Less Than Forecast
Comment of the Day

September 13 2013

Commentary by David Fuller

Retail Sales in U.S. Increase Less Than Forecast

Here is the opening from today's report by Bloomberg
Retail sales in the U.S. rose less than forecast and consumer confidence fell to a five-month low, signaling weakness in the world's largest economy days before Federal Reserve policy makers meet to consider paring stimulus.

Purchases climbed 0.2 percent in August, the smallest gain in four months, after a revised 0.4 percent July advance that was bigger than previously estimated, the Commerce Department reported today in Washington. The Thomson Reuters/University of Michigan's preliminary September gauge of sentiment dropped more than projected, to 76.8 from 82.1.

"The consumer has lost a bit of enthusiasm," said Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit and the second-best forecaster of retail sales the past two years, according to data compiled by Bloomberg. "Retail sales are still growing, though not as solidly as before."

Higher payroll taxes, limited employment opportunities and restrained income growth are testing consumers' desire to shop. The data, which followed a smaller-than-forecast increase in August payrolls, sent Treasuries higher on bets Fed policy makers will throttle back more slowly on the pace of bond purchases aimed at boosting the economy.

The yield on the 10-year Treasury note fell two basis points, or 0.02 percentage point, to 2.89 percent at 12:46 p.m. in New York. The Standard & Poor's 500 Index climbed 0.2 percent to 1,686.76 as it headed for its best week since July.

David Fuller's view I am sure that Mr Bernanke and his colleagues would like to have seen somewhat stronger GDP growth before the Federal Reserve's two-day meeting commencing next Tuesday. However, the US economic recovery, indeed the global recovery, is about where one would expect, less than five years following a severe credit crisis recession.

The Fed Chairman's quantitative easing (QE) programme has certainly had its critics, particularly in its earlier years. I have not been among them because I think the crunch in 2009-2010 and possibly longer would have been considerably more severe in terms of bankruptcies and unemployment. That would have been very damaging, not least in terms of social costs for families, even if GDP growth might have subsequently been somewhat stronger today.

With QE, the deleveraging process was slower and more orderly for households and businesses. The flip side is that the Fed and other central banks are now considerably more leveraged.

That would be a problem if long-term interest rates saw another run to the upside of 140 basis points, as occurred between May and early September for US 10-year Government bonds (weekly & daily). Hopefully, the next upside move of similar proportions will occur at a much more leisurely pace, which is a reasonable expectation given the slow rate of global economic recovery.

Fortunately, the outlook for most stock markets remains considerably more attractive. The interest rate environment remains generally benign, despite the rise in bond yields and the probability that the Fed will commence a modest tapering of QE next week. Short-term interest rates remain very low in developed countries. Corporate Autonomies continue to benefit from low borrowing costs, increasingly open global markets, and particularly the accelerating rate of technological innovation.

Equity valuations are somewhat higher right now, following the excellent rally between November 2012 and May 2013. Those higher valuations are the main reason why I expect a somewhat choppy stock market environment over the lengthy medium term. Nevertheless, the global economy should continue its gradual recovery without too many setbacks of consequence. If so, that will mostly lower valuations through earnings growth rather than stock market swoons.

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