Last week’s jobs report was amazing, plain and simple. The U.S. economy added 321,000 jobs, far exceeding consensus analyst estimates of 235,000 jobs. The unemployment rate fell slightly to 5.8 percent, from a high just above 10 percent at the trough of the Great Recession.
The stock market continues to set new, all-time highs. So why isn’t the economy growing at a robust pace? The answer is simple, although the solution will be complicated: consumers just aren’t spending money.
This Thursday, the Commerce Department will release its monthly report on retail sales. November retail sales are expected to decline slightly, to 0.2 percent growth from 0.3 percent. If auto sales are excluded, retail sales are expected to decline to 0.1 percent from 0.3 percent.
The real test for the economy will be the December retail sales figures, which will not be released until next month. However, based on the Thanksgiving weekend sales result — a decline of 11 percent from the previous year, which was also down significantly from 2012 sales, it does not appear that consumers have changed their spending habits. And that is despite the skyrocketing stock market, improving employment picture, and encouraging GDP growth through the first three quarters of 2014.
The recent drop in oil prices, which has translated to drastically reduced gasoline prices, should give consumers further reason to spend. One station has even dropped gasoline prices to below $2 per gallon just this past week, and OPECvoted not to cut production. With increased U.S. production of more than 1 million barrels per day, and a glut of oil around the globe, we should see oil prices, and by extension gasoline prices, continue to fall. (Incidentally, it is interesting that those who were screaming about peak oil just a few years ago are curiously silent these days.)
Unfortunately, it appears that falling gasoline prices have come too late to have a meaningful impact on consumer spending during this holiday season. Preliminary estimates show that the average household will have an extra $1,100 to spend, should gasoline prices stay at current levels for the next year. Certainly, as gas prices fall further, that figure would increase.
Any potential benefit from low gas prices may be offset, in part or in total, by rising interest rates. The stellar result from the most recent employment report has given the Fed more reason to increase rates sooner rather than later, with the timing of the first rate increase still very much up in the air. Should rates begin to rise early in 2015, any positive impact of lower gasoline prices could be squashed by consumer concerns over increasing costs for credit cards, consumer loans, etc.
There is also some risk in reading too much into the latest jobs report. Although the 321,000 jobs was a huge feat compared to expectations, there was a significant component for retail (50,000 jobs added) relating to seasonal hiring for the holidays.
Still, professional and business services (white-collar jobs) was the largest category, with 86,000 jobs added. These are the jobs that generate the most discretionary income — money available to consumers after living costs are covered. Although this facet of the jobs report was impressive, it too likely has come too late in the year to have a meaningful positive impact on holiday spending.
The 800-pound gorilla in the Fed’s conference room is wage growth. Despite the substantial improvement in payrolls since the depths of the Great Recession, wages have not grown on pace with the rest of the economy or the stock market.
The most logical explanation for this is the hangover of underemployment — workers who have a job, but are not earning as much as they should or could, given their skills, education and experience. As employment conditions continue to improve, employers will be forced to raise wages to attract workers, and underemployment will decrease. However, at this point, we are not seeing upward pressure on wages, and this is likely the most significant reason why consumes are still not spending.
It will be interesting to see the data from the fourth quarter, and in particular the retail sales results. Retailers have made big bets on consumers, raising inventories in anticipation of the best holiday selling season since before the Great Recession began.
Should consumers fail to meet expectations, retailers will be stuck with excess inventories that they will need to drastically discount to move off of shelves. This could set up the retail sector for highly disappointing results over two consecutive quarters — the fourth quarter with weak sales results, and the first quarter of 2015 with poor margins due to discounting.
Poor performance from the retail sector, along with the rising threat of the Fed moving up the timing of its first rate increase, could combine to drive stocks into the long-awaited correction/crash that so many of us have been anticipating for many months.
December is typically a great month for equities, and so far performance has been solid. Investors are usually reluctant to realize profits so close to the end of the tax year, so it is unlikely that we will see a significant retraction in stocks, short of a major political issue.
January may be another story, however, as holiday results flow in, we receive more specific guidance from the Fed on interest rates, and investors evaluate their portfolios for possible profit-taking.