Inside The December Retail Report: "Disappointing" Isn't The Half Of It

Today's 0.9% decline in December retail sales apparently came as a shock to bubblevision's talking heads. After all, we have had this giant "oil tax cut", and, besides, the US economy has "decoupled" from the stormy waters abroad and is finally on its way to "escape velocity".

The Wall Street touts and Keynesian economic doctors have been saying that for months now----while averring that all the Fed's massive money printing is finally beginning to bear fruit. So today's retail report is a real stumper-----even if you embrace Wall Street's sudden skepticism about government economic reports and ignore the purported "noise" in the seasonally maladjusted numbers for December.

All right then. Forget the December monthly numbers. Why not look at the unadjusted numbers in the full year retail spending report for 2014 compared to the prior year.  Recall that the swoon from last winter's polar vortex overlapped both years, and was supposed to be a temporary effect anyway-----a mere shift of consumer spending to a few months down the road when spring arrived on schedule.

On an all-in basis, total retail sales in 2014 rose by $210 billion or a respectable 4.0%. But 58% of that gain was attributable to two categories---auto sales and bars&restaurants---which accounted for only 28% of retail sales in 2013. And therein lies a telling tale.

New and used motor vehicle sale alone jumped by $86 billion in CY2014 or nearly 9%. Then again, during the most recent 12 months auto loans outstanding soared by $89 billion. Roughly speaking, therefore, consumers borrowed every dime they spent on auto purchases and took home a few billion extra in spare change.

The point here is that no economy can thrive for long---especially one already at "peak  debt"----based on consumer "spending" that is 100% dependent upon borrowed funds. Yet that has been the essence of the retail sales rebound since the Great Recession officially ended in June 2009. Auto sales, which have been heavily financed by borrowing, are up by about 70%; the balance of non-auto retail sales, where consumer credit outstanding is still below the pre-crisis peak, has gained only 22%.

Stated differently, the only credit channel of monetary policy transmission which is still working is auto credit. Yet as indicated earlier this week (see, "The US Hasn’t “Decoupled” And There Ain’t No Giant “Oil Tax Cut”) that actually amounts to a proverbial "accident" waiting to happen.

On the margin, the boom in auto loans, which are now nearing $1 trillion in outstandings, is on its last leg. The latest surge of growth has been in "subprime" credit based on the foolish assumption that vehicle prices never come down; and that the junk car loan boom led by fly-by-night lenders is nothing to worry about since loans are "collateralized". That is, they could be made to derelicts and deadbeats as long as their location is known to the repo man.

The problem with that glib assumption is that it ignores the lesson of the housing crisis, where it was also said---by Bernanke himself----that nationwide housing prices never fall. Yet what happened in 2006-2007 is that the residential housing stock got massively over-priced, and was then collaterized at these lofty, unsustainable levels. So when the last deadbeat mortgage borrower got funded, the price level broke and the house of cards came tumbling down, pulling prime borrowers as well as subprimes underwater as valuations plunged.

And so it goes with autos. Including the backdoor debt on rental fleets and leased vehicles, there is now more than $2 trillion of debt on the auto fleet, and there are millions of vehicles coming off-lease owing to the financing surge of recent years. When the subprime car loans begin to fail at double digit rates----and frisky lenders like Santander are already there----the repo man will get busy like never before. And that will mean, in turn, a tsunami of discount vehicles at the used car auctions, and a subsequent bout of price destruction up-and-down the entire auto food chain.

The reason is straight forward. Loan-to-value ratios are already upwards of 120% in many instances; and lenders are financing not only the vehicle purchase price, but taxes, title, insurance, amounts owed on "underwater" trade-ins and cash-back awards, too.

So when the new/used vehicle price chain breaks, there will be a spillover effect on the prime lending and new car segment, as well. Namely, credit terms will tighten dramatically owing to rising defaults; an increasing share of households will be too underwater on existing loans to finance a new car; and the sub-prime sector will go into shutdown mode, as it did after 2008, when the plug is abruptly pulled on its junk bond financing and private equity sponsorship.
US Auto Loan Debt Chart

US Auto Loan Debt data by YCharts

So, yes, retail auto sales have been in a V-shaped rebound, which seems almost too good to be true compared to everything else in the Census's Bureau's reporting. But unless auto debt grows to the sky, "pear-shaped" may be the next phase of the chart.

The 6% growth in the food and drink category reflects a second artifact of the Fed's money pumping binge. When it comes to actual dollars spent in bars and restaurants it is not the median income household----still 7% below its real income level of 2007---that has been splurging on an extra night out at Red Lobster. The truth is, its the affluent top 20% of households which drive the cash registers.

In that regard, has it been noted that the top 20% of households also own upwards of 90% of outstanding financial assets and especially stocks and mutual funds? Yes it has.

Indeed, while the Fed's wealth effects fantasy has accomplished nothing for the main street economy-----this small $570 billion sliver of the US economy is the exception. The hearty rebound in bars and restaurants has given the talking heads something to chatter about with respect to the purported retail sales recovery; and it has also provided a reliable boost to the headline count on "jobs Friday"-------even if these "jobs" average about 26 hours per week and annualized pay rates of $17,000 per year.

Bread and Circuses Economy Jobs- Click to enlarge

Bread and Circuses Economy Jobs- Click to enlarge

Needless to say, the eventual bust of the Fed's third financial bubble this century will hit "food service and drinking places" hard. As a recent analysis by the Atlantic Monthly noted, there are...

"....some pretty spectacular differences between rich and poor families' eating habits. The richest quintile spends about 4X as much as the poorest in general-- but it spends 6X on alcohol, 5X on dining out, and 3X on food."

The crucial difference between rich families and poor families, as the Atlantic further noted, isn't really

"....what they eat, but where they spend their food money. Poorer families eat much more at home. Richer families spend more money (but a similar share of their income) dining out."

As shown below, the top 20% of households spend 5X more on restaurants than the bottom 20%. Viewed in aggregate terms, the top 23 million households in the US spend about $125 billion per year on restaurants or more than the bottom 60% combined.

Screen Shot 2013-03-07 at 3.39.41 PM.png

So back to the 2012 retail spending report. Set aside debt fueled spending on autos and stock market goosed spending at bars and restaurants, and here's what remains. Retail spending, according to the Census Bureau, for everything else in 2014---groceries, electronics, furniture, sporting goods, apparel, general merchandise, e-commerce etc.----- amounted to $3.724 trillion. That compares to $3.633 trillion in 2013, representing a rather tepid 2.4% annual gain.

And, yes, there was some significant inflation last year at the consumer level, too----notwithstanding all the Keynesian gumming to the contrary.  In fact, the consumer price index for 2013 averaged 232.81 compared to 236.76 in 2014.

it doesn't require higher math skills to compute the resulting 1.7% gain in consumer prices----and that's if you believe that the BLS' hedonically adjusted, geometrically mean'd, mix-adjusted index actually measures inflation. In any event, real spending for everything else in the December report clocked in at 0.7% gain.

But that should not be surprising. Outside of the beneficiaries of the auto debt bubble and wealth effects spending, main street America has nothing to spend but its wage and salary income. And, as is well known, that has been going nowhere ever since the Fed starting pumping its latest bubble.

Unfortunately, the MSM had such a severe case of "recency bias" that it does not even appreciate the profound implications of that unassailable fact. So here you have it in historical perspective. After 60 months of "recovery" from the official end of the recession, real hourly compensation is up by less than one-half of one percent.

It is off the charts compared to all prior experience. And, as they say, not in a good way.


It is said that Yellen's labor market dashboard contains 19 different graphs. But you can bet that this one is not among them.

You can also bet that our mad money printers have no clue that today's retail report was far worse than the headlines proclaimed. They have pumped the auto debt bubble about as far as it can go; and the bars and restaurants are more than saturated with spending from "wealth effects"  beneficiaries who do not have many windfall gains yet to harvest.

So when retail sales continue to roll-over in the months ahead, don't expect our monetary central planners and their bullhorns on Wall Street to have the slightest clue as to why.

David Stockman's Contra Corner is the only place where mainstream delusions and cant about the Warfare State, the Bailout State, Bubble Finance and Beltway Banditry are ripped, refuted and rebuked. Subscribe now to receive David Stockman’s latest posts by email each day as well as his model portfolio, Lee Adler’s Daily Data Dive and David’s personally curated insights and analysis from leading contrarian thinkers.

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