Eyes on The Consumer

The stock market could get some relief from February Retail Sales if consensus estimates are right.   Despite recent negative comments from retailers, consensus looks for +0.7% m/m Total and +0.5% Ex Auto.  This could be a weather-related rebound after declines in January (Total down 0.9% and Ex Auto down 0.4%).  Whether the health of the consumer is affirmed by this report could depend on how the January-February average stacks up against Q424 or how February's level compares to the January-February average.  The greater the improvement in either, the healthier the consumer.  If the retailers are right and retail sales fall again, the recession risk will get more play and hurt stocks.

Retailers blame fears of inflation and recession for the sudden consumer pullback they see.  These reasons appear to be confirmed by the University of Michigan Consumer Sentiment Survey.  The irony is that the latest data don't support these fears.  The February CPI and PPI showed that inflation remains near trend, if not slowing a bit.  And, Unemployment Claims indicate a still solid labor market.  Both Initial and Continuing Claims in February are within the low ranges seen since September-October. 

This would not be the first time the consumer pulled back sharply on questionable fears.  The consumer "went on strike" in 1980, reacting to misunderstood Credit Controls by the Carter Administration.  Many consumers apparently believed the Controls banned the use of credit cards, and they stopped spending as a  result.  The economy went into a steep dive that lasted two quarters.  Then, an ending of the Controls and lower interest rates led to a sharp rebound in spending and economic activity in the second half of the year.  

To be sure, there is a possibility that a sudden weakening in consumption has resulted from the stoppage of immigration.  Spending may have slowed as did population and employment growth.  This possibility raises the risk that the trends in consumption and the economy have ratcheted down. 

Trump's tariff actions and threats may continue to be a problem for the stock market.  They have been a mixture of temporary "transactional" moves to achieve an unrelated goal and more permanent revenue-producing tariffs.  The markets are never sure in which category a tariff announcement should be viewed, helping to explain the stock market's wild reactions.  The tariff problem should end for the market when the various countries decide to sit down together to settle the situation, just like what happened between the US and China in 2019-20.

There is a simplistic way of looking at tariffs that may shed light on Trump's actions.  Think of the economy as consisting of producers and consumers.  This is simplistic because everyone is a consumer.  Trump is aiming to help producers by protecting them from foreign competition.  But, he is downgrading consumers.  This split was articulated by Treasury Secretary Bessent, who said "access to cheap goods is not the essence of the American Dream."  Instead, he said "the American Dream is rooted in the concept that any citizen can achieve prosperity, upward mobility, and economic security."

With all this going on, it should not be surprising if this week's FOMC Meeting is a non-event, ratifying Fed Chair Powell's recent comments that monetary policy is on hold.  He will likely restate the policy restraint necessitated by the uncertainty surrounding Trump's policies.  The Central Tendency Forecasts will not likely change much from December, including the possibility of 1-2 rate cuts this year.