UBS House View Daily

Thought of the day

16.08 - Retail therapy for the US economy

Strength in US retail sales and wages have been the missing ingredients in the long recovery from the 2007–09 recession. Over the last 25 years, annualized retail sales growth averaged 5.5% before the Great Recession, and has only averaged 3.9% since it ended in June 2009. The latter average is also flattered by positive base effects with the sharp declines in retail sales in 2008–09.

But, while we do not expect a sharp acceleration in US consumption in the second half of the year, the latest data show solid growth in consumer spending:

  • Retail sales climbed 0.6% in July (beating consensus expectations for a 0.3% rise), and both June and May figures were revised upwards. Plugging these data into the Atlanta Fed GDPnow model gives a forecast of 3.7% growth for the third quarter.
  • The better start to the third quarter builds on the 2.8% increase in consumer spending in 2Q17, a large contributor to the 2.6% increase in GDP. Real disposable incomes for the second quarter increased by 3.2%; this could take some pressure off the personal saving rate, which has been falling over the last year.
  • Wage growth is also not as anemic as it appears, which is encouraging for future growth in consumer spending. Average hourly earnings increased by just 2.5% on an annualized basis in July. But three-month average wage growth according to the Atlanta Fed’s wage growth tracker, which is less influenced by changes in the composition of the workforce, increased by 3.3% in July.

So, while the US economy is not racing along, consumer spending, which accounts for more than two thirds of GDP, is on solid foundations. This backdrop is supportive for US equities, and we remain overweight global equities.

Chart of the day

Retail therapy for the US economy

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