- Consumers continue to spend despite rising inflation.
- Gas prices surged to $4 per gallon or higher in all 50 states for the first time.
- The stock market flirted with a bear market.
COVID cases increased again last week and exceeded levels seen at the same time last year. However, severity indicators, like fatalities and ICU admissions, remain at or near pandemic lows. COVID cases combined with the war in Ukraine, rising inflation and a volatile stock market are negatively impacting consumer sentiment.
Retail sales increased solidly, indicating consumer demand endures despite high inflation. However, both Walmart and Target reported significant earnings misses for the first quarter, suggesting inflation may be beginning to have a negative impact on the retailing industry.
Rapidly rising mortgage rates and lower affordability are impacting housing demand. Both housing starts and existing home sales declined in April.
The labor market remains tight, with continuing jobless claims at historic lows. Initial claims, however, have stopped declining and increased last week at the highest rate since the week ending January 22.
Gas prices surged, rising to record levels nationwide. For the first time, gas prices exceeded $4 per gallon in all 50 States.
The stock market correction accelerated this week and as of Friday afternoon, the market was flirting with bear territory (20% or more below the most recent high).
Retail sales mixed: Retail sales were in line with expectations in April, increasing 0.9% from the previous month versus an estimate of 1%. The reading indicates the consumer has somewhat shrugged off high inflation and keeps spending. Retail sales numbers are not adjusted for inflation, so some of the boost is simply a function of higher prices.
April’s increase was driven primarily by three retail categories: misc. retail (+4.0%); auto dealers (+2.2%); and online sales (+2.1%). The increased spending at dealerships from the previous month is consistent with some momentum in the spring selling season as the slow pace of tax refunds picked up. Sales at gas stations declined 2.7% in April, indicating consumers are managing spending and driving habits as gas reach record levels.
Year-over-year April retail sales were up 8.2%. The biggest year-over-year gainers were gas stations (+36.9%) and food services & drinking places (+19.8%). The high double-digit year-to-year increases in these categories reflect inflation more than organic increases in demand. Even with the inflationary impact, sales at auto dealers decreased 1.7% from a year ago. Supply constrained April 2022 had a tough comparison versus the frenzied spring market of 2021.
April retail sales seemed to indicate a resilient consumer. Still, earnings reports from Walmart and Target missed estimates, as they cited rising costs and sales declines in key categories outside consumer essentials. This may signal that households are beginning to feel increasing financial pressure.
Housing hit by high rates: Housing starts declined 0.2% from a month ago to an annualized 1.724 million units in April, after a revised 2.8% drop in March and below market forecasts of 1.765 million. Single-family housing starts dropped 7.3% to 1.1 million. Multi-family housing jumped 16.8% to 612,000. Sales fell in the Northeast (down 23.2%) and Midwest (declined 22%) but rose in the South (up 10.6%) and West (up 3.3%). The housing market shows signs of cooling as inflation soars, mortgage rates hit 12-year highs, building material costs remain elevated, supply constraints persist, and general economic uncertainty weighs on the buyer.
Home sales fall: April’s home sales suggest an inflection point for the housing market. Existing home sales declined by 2.4% to a SAAR of 5.61 million, the lowest level since June 2020 and just short of estimates of 5.65 million. Sales declined for the third straight month, as higher home prices and mortgage rates reduced affordability. Total housing inventory amounted to 1.03 million units, up 10.8% from March. The median existing-home price for all housing types was $391,200, up 14.8% from April 2021.
Jobless picture bright: Continuing claims for unemployment benefits remain at historic lows. As of May 7, 1.32 million people were receiving unemployment insurance, a decrease of 25,000 from the prior week. This was the lowest level for continuing claims since Dec. 27, 1969 (1.3 million).
However, initial unemployment claims have ticked up in recent weeks. The number of filings for new claims for unemployment benefits increased by 21,000 to 218,000 in the week ended May 14, from a revised 197,000 in the previous period and above the market estimate of 200,000. This is the highest reading since the week ended Jan. 22. Notable increases by state include Kentucky (+6,728), California (+3,315), Pennsylvania (+2,102) and Illinois (+1,827).
Gas prices surge: Gas prices continue to rise, complicating the Fed’s battle to rein in inflation. A significant milestone was reached last week with gas prices hitting a record average high nationwide ($4.59) and moving above $4 per gallon in all 50 States.
Volatile stock market: The stock market has been in correction mode for the last few weeks in response to rising interest rates that dampen growth prospects for the year. Last week the correction accelerated into a flirtation with a bear market (20% or more off the most recent high). As of Friday, the S&P 500 had crossed the bear market threshold, down 20% from its Jan. 3 record close. Last week, a key fear catalyst was the earnings misses noted above by bellwether retailers Walmart and Target, which have seen inflation impact profitability. Both companies saw their stocks sell off to multi-decade lows.
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Michelle Krebs is executive analyst at Cox Automotive.