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Retail spending a shot across the bow for the economy



Canadian consumers are getting restless, touchy, and otherwise to the end of their fuse when it comes to inflation, Omicron and several other challenges. That's not a good sign for the economy. Across the border, the situation is quite the same.

Americans shopped less in December, causing the first drop in retail sales since the summer.


Sales dropped 1.9% in contrast with November, adjusted for seasonal swings as the Census Bureau (In the U.S.) reported last Friday. We await the Canadian numbers this Friday, and economists are anticipating a 1.3% increases month over month.


This weakening in retail sales overlapped the swell in Covid cases due to the highly infectious Omicron variant. In July of last year, the last time sales in the U.S. and Canada dropped, it was on the back of the number of cases rising due to the Delta variant. A drop in retail numbers is a warning shot across the bow of the economy when this happens during the heavy Christmas buying season. It is a sign to watch closely and be careful; to think outside the box and diversify our wealth.


But let's take it a step further and consider other areas. In December, restaurants and bars also registered a 0.8% decline in sales as people stayed home to protect themselves against the virus. Online U.S. retail witnessed a sharp 8.7% drop, too, likely because people shopped earlier for the holidays after warnings of delays in delivery and shortfalls in available inventory. But this is the exact thing that left traditional last-minute shoppers at wit's end as they scrambled to pick up items for the holidays that were not on the shelves or available, adding to the overall frustration the retail consumer is feeling.


The pullback in retail sales is "disconcerting," said Lydia Boussour, lead U.S. economist at Oxford Economics. But she noted that the holiday shopping season was longer than ever, with stores urging customers to get their gift buying done early to avoid shipping delays from the jammed supply chain.


However, I am only one person, but truthfully we scaled down our buying for many reasons. It is not because I want to see retailers do poorly. Still, a lot of uncertainty lies ahead with covid, a lagged reboot to what was supposed to be a big boom in GDP and so forth, but is now turning out to be a lesson in spending more debt as consumer credit debt expands yet again.


The weak end to the year doesn't bode well for consumer spending, which is the backbone of the Canadian and the U.S. economy. Weaker spending will weigh on economic growth in the final quarter of the year and slow momentum going into the first quarter of 2022, Boussour said.


On the whole, however, it was still a good year for the retail sector, with U.S. sales rising 19.3% and Canadian sales not far behind. We witnessed a post delta variant spending boom, especially in the real estate and construction segments. But as we pointed out two weeks ago on the Hard Money show, increases in consumer debt are not akin to real prosperity and real economic growth derived from increases in productivity and overall wage increase.


Moving forward, we are likely to hear this repetitive rhetoric from any number of clever talking heads that "consumer spending should rebound in the spring, given the combination of a strong labour market, income growth, and excess savings." But why risk this being correct. The warning signs are all around us, and as we discussed on the Hard Money show last week, at several economists are saying a crash is coming.


Market Insider ran two articles this past week. The first one was the summary of an interview with Paul Tudor Jones, the billionaire hedge fund manager. The headlines were "Billionaire trader Paul Tudor Jones rings the bubble alarm, warns the Fed could tank the economy."


In the interview, he warned that "U.S. equities are really extraordinarily valued relative to GDP." He also went on to suggest that "Commodities are so incredibly undervalued relative to financial assets. One would think on a relative basis, as we go through this tightening, that commodities would outperform financial assets by a wide margin."

These were just two of his points in the article/interview. The situation's urgency was all too real as he progressed through other topics of inflation, debt, and the back end of the boom cycle.


The second article, entitled "Legendary investor Jeremy Grantham sees an epic market bubble and expects a historic crash. Here are his 12 most dire warnings," was an excellent behind-the-scenes look at where the world's largest economy that of the U.S. is.


In the article, Grantham points out that "This bubble is the real thing, and everyone can see it. It's as obvious as the nose on your face… You knew last year this bubble was going to be the real McCoy, but you didn't know if it would break the next Wednesday or a year later. One by one, we've checked off every condition that a glorious bubble needs in terms of crazy behaviour. This has been crazier by a substantial margin than 1929 and 2000."


The GMO co-founder called out dangerous speculation on meme stocks and cryptocurrencies and pointed out that this is likely to be the largest bubble the U.S. economy has ever experienced.


The start to 2022 has been rough, amid the Omicron surge and inflation that keeps trending higher. Add to this that our current bout of inflation is being felt the world over in most meaningful econommies. You begin to see that there is not likely to be an outcome that supports the notion of a return to real prosperity and growth through productivity and less debt.


Add to all of this a drop in U.S. consumer sentiment in January, according to preliminary data from the University of Michigan, falling to 68.8, or the second-lowest level in a decade, and it underscores that there is plenty of accurate world data supporting the notion of a weakening overall economy.


What can you do? Enjoy the ride, lighten up on the profitable trades, especially real estate. Diversify your wealth strategy with quality assets such as gold and silver and stay the course. But this is my opinion only, not my advice, since I continue to advocate for complete due diligence and partnerships with experts you trust with your wealth decisions.


We will see soon enough. The only question now is what three, four or five mortgage rate increases in the coming months will do to a housing market that lost its mind.

People with historic windfall gains afraid to sell have no idea what may lie ahead. Be smart.


Yours to the penny,


Darren V. Long

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