Consumer and housing concerns are starting to bubble up

With the Holiday shopping season annoyingly underway looming, it seems like a good time to see what might be going on with consumer spending. And there was some cause for confidence when we saw last week’s US Retail Sales report for October, as the topline figures looked strong.

Advance estimates of U.S. retail and food services sales for October 2018, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $511.5 billion, an increase of 0.8 percent (±0.5 percent) from the previous month, and 4.6 percent (±0.5 percent) above October 2017. Total sales for the August 2018 through October 2018 period were up 5.0 percent (±0.5 percent) from the same period a year ago. The August 2018 to September 2018 percent change was revised from up 0.1 percent (±0.5 percent)* to down 0.1 percent (±0.2 percent)*.

Retail trade sales were up 0.9 percent (±0.5 percent) from September 2018, and 4.3 percent (±0.5 percent) above last year. Gasoline Stations were up 16.2 percent (±1.6 percent) from October 2017, while Nonstore Retailers were also up 12.1 percent (±1.4 percent) from last year.

Overall, that sounds pretty good. But note that gasoline figure, and remember that retail sales do not account for inflation.

According to the most recent Consumer Price Index report, gasoline prices rose by nearly 17% over the same time period, and was up 3% in October 2018 alone.

What this means is that these allegedly strong retail sales numbers aren’t as hot, although they’re still not bad.

Retail sales minus gasoline
Oct 2018 vs Sept 2017 +0.5%
Oct 2018 vs Oct 2017 +3.6%
Aug-Oct 2018 vs Aug-Oct 2017 +3.1%

And now that gasoline prices have fallen hard in the last month, it seems logical that retail sales might also “decline” for November, and people panic instead of looking underneath and seeing how much that drop is due to lower gas prices. But what both months may indicate is that consumer spending growth could be moderating from the strong 4.0% pace reported for 3rd Quarter GDP (and the downward revisions for September indicate that 4% figure could also end up lower).

There also is some iffiness with the housing market, as higher prices and higher interest rates might be putting homes out of reach for many people, even with low unemployment and a minor pickup in wage growth. Note this story from last week.

Mortgage application activity decreased 3.2% from one week earlier as interest rates rose to eight-year highs and refinancings fell to an 18-year low, according to the Mortgage Bankers Association.

The MBA's Weekly Mortgage Applications Survey for the week ending Nov. 9 found that the refinance index decreased 4.3% from the previous week reaching its lowest level since December 2000. The refinance share of mortgage activity increased to 39.4% of total applications from 39.1% from one week earlier.

The seasonally adjusted purchase index decreased 2.3% from one week earlier reaching its lowest level since February 2017, while the unadjusted purchase index decreased 5% compared with the previous week and was 3% lower than the same week one year ago.

On a similar note, the Wisconsin Realtors Association reported over the weekend that fewer homes continue to be sold in Wisconsin compared to last year, while prices of those homes kept rising well past the rate of inflation or wage growth.

The right-wing Realtors tried to claim the overall economy was still good, but even they had to admit that rising prices and rates were taking its toll on their business.

"Prices continued their upward trajectory and mortgage rates also increased by just under one percent over the past year, so affordability has definitely slipped," said WRA President & CEO Michael Theo. The Wisconsin Housing Affordability Index shows the fraction of the median-priced home that a buyer with median family income can qualify to purchase, assuming 20 percent down and the remainder financed using a 30-year fixed-rate mortgage. The index fell from 219 in October 2017 to 196 this past October, which is a 10.5 percent reduction in affordability over the last 12 months. "The strong economy has kept affordability from dropping further," said Theo. Median family income in the state is estimated to have increased just over 5 percent since October of last year. "The flip side of a strong national economy is that the Fed will likely continue to hike interest rates, which will translate into higher mortgage rates over the next year" he said. Rising prices and rising mortgage rates will continue to put pressure on affordability so considering a move in the winter may turn out to be a good decision in the long run.

But Wisconsin wages and job growth are hardly booming, no matter how Theo wants to spin it, and the rising home prices and increasing number of school referenda indicate that the claim of Scott Walker and the Wisconsin GOP that “your property taxes will be lower” is unlikely to be the case when you get your bill this Fall.

Now combine that squeeze with the fact that many middle-class Americans will get another surprise when they file their federal taxes and realize that it won’t be worth it to write off their mortgage interest or property taxes because the increased standard deduction is larger and the State and Local Tax (SALT) deduction is limited to $10,000 per couple. It makes me wonder if there’s a real danger of a bubble popping in housing which tightens up the wallets of Wisconsinites and others in the coming months.

Which makes it notable that there was another warning out yesterday about the housing market, and it played a role in tanking the DOW Jones Industrial Average by nearly 400 points yesterday.

Confidence among U.S. homebuilders plummeted by the most since 2014 as the highest borrowing costs in eight years restrain demand, adding to signs of a cooling housing market that will weigh on the Federal Reserve’s debate over how far to raise interest rates.

The National Association of Home Builders/Wells Fargo Housing Market Index dropped eight points in November to 60, the lowest level since August 2016, according to a report Monday. That compared with the median estimate of economists for a one-point drop to 67.

Shares of homebuilders initially fell and 10-year Treasury yields erased gains following the report, which represents one of the first breaks in elevated levels of business and consumer confidence that have persisted since Donald Trump was elected president in November 2016. While the index remains in positive territory, the group called on policy makers to take note of the housing situation as a possible warning sign about the broader economy.

But the country’s high budget deficits mean that central bankers might not want to limit their plans to keep raising interest rates, as it becomes difficult to get enough money to finance our increasing debt if bond-buyers can’t get a good rate.

I’m not saying we’re in stagflation yet, but you can see how things are set up where a number of small annoyances barriers can add up to an economic slowdown and/or recession in the near future. And the way out of that economic slowness will not be fun or easy, since we’ve already shot most of our weapons to fight those problems as a result of the GOP Tax Scam and wage growth that still doesn’t seem able to overcome the growing debt and expenses everyday people continue to have.

Which brings us back to Holiday shopping, as it seems like those figures could go a longer way than normal toward indicating whether our economy is OK heading into 2019, or is in big-time danger of going over the edge.