US: Mixed Consumption, Pressure on Wages and Inflation

Dan North | September 22, 2021

The retail sales report for August 2021 blew past expectations of falling -0.8% and instead rose +0.7% to a 15% y/y increase. Gains were widespread across industries with the notable exception of autos which fell for the fourth consecutive month, losing -3.6% m/m and driving the y/y rate to +10.3%.

While that would normally be a terrific number, it was 107% in April. There aren’t enough cars to buy as the global chip shortage continues to weigh on auto manufacturing. Total retail sales excluding autos, therefore, looked even better, rising 1.8% m/m to a 16% y/y rate. It’s a strong report.

wages - sept2021

But it’s not telling the whole story at all.  First, July retail sales were revised down sharply from -1.1% to -1.8%, and that puts total retail sales below the level from May.

In fact, over the past three months, retail sales have fallen at an annualized rate of -2.9%. From that perspective, retail sales are losing ground. It is an admittedly volatile calculation, but it does capture the most recent movements.

nfibsurvey - sept2021
In addition, retail sales only cover about 40% of all spending and don’t capture some services like flying or staying in a hotel. Those are headed back down as shown below
job openings-sept2021
covid lists - sept2021

Furthermore, recent higher inflation has exaggerated the gains in retail sales. Normally retail sales are reported on a nominal basis, that is the actual dollar amount because that’s the world retailers live in. Those sales include not only the number of goods (let’s call them widgets) but the price of the widgets as well. 

However, if we strip out the price component, inflation, we get the actual volume of widgets sold, and what’s known as “real” retail sales. And on that basis, the picture is not as rosy, since real retail sales are only growing 9.4% y/y compared to nominal sales of 15%. To be sure, 9.4% is terrific, but it’s less than the 15% which has been pumped up by inflation.

continuing jobless claims - sept2021
Speaking of inflation, August’s Consumer Price Index (CPI) report showed some cooling. Consumer inflation gained 0.3% m/m, the lowest in seven months. But on a y/y basis inflation cooled only a shade from 5.4% last month to 5.3%, and that 5.4% is the highest in 13 years.
continuing jobless claims - sept2021

There were some big movements to the downside, especially reflecting a falloff in travel as shown in the TSA and hotel charts above. Airfares fell -9.1% in August from July, car, and truck rental prices fell -8.5% m/m, while hotel prices fell -3.3% m/m.

Without those big drops, the report would surely have shown a bigger increase in the headline number. When the Federal Reserve meets next week, it is likely to reiterate its stance that the current inflation is transitory.

However, respondents in the ISM survey, as well as others, politely disagree. They describe very strong pricing pressure due to supply chain shortages, and a lack of labor driving up wages, and it’s unclear as to when those problems will dissipate. Furthermore, those supply chain problems include a wild increase in transportation costs and a crippling lack of truck drivers.

I pinched the chart below from the Wall Street Journal and it shows spot shipping prices for containers were around $1,000 in October 2019 and are now up above $25,000 – I can’t come up with a big enough word to describe how much that is. Many businesses including major corporations are now paying much higher prices for inputs, and they will likely have to pass some of it on to consumers.

covid lists - sept2021

As noted, the lack of labor is now putting significant pressure on wages. The National Federation of Independent Business (NFIB) survey clearly demonstrates how compelling and pervasive this upward force on wages is.

The net percentage of respondents who have already raised compensation is at a record high, while the net percentage of respondents who plan to raise wages is just off of last month’s record high.

continuing jobless claims - sept2021
The latest Covid charts show that the Delta variant may have stalled.
JP Morgan - sept2021
JP Morgan - sept2021
The reproductive rate remains elusively close to 1 where supposedly the disease stops spreading.
vaccinated people - sept2021
vaccinated doses- sept2021
vaccinated doses- sept2021

Consumers are still out there, but slowing purchases for some items such as travel-related services and cars. Inflation is still hot and is still here. Employees are raising wages.

The delta variant may have stalled, but as we have so drearily repeated, the vaccination effort has also stalled. This news should not be overly worrisome, the overall picture of the economy is mostly pretty, just not as pretty as it once was.

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