Next week, the Census Bureau will release its June Monthly Retail Sales report. Based upon the month’s stronger year-over-year foot traffic trends, we expect the report to show another improvement in trend, with the underlying year-over-year growth rate (excluding autos and gas) likely 50- to 100-basis-points stronger (suggesting +3.7% growth year-over-year at the midpoint). This also aligns with Costco’s reported June sales, where U.S. comparable sales accelerated 60 basis points to +6.3% on stronger traffic (up +5.9%) and non-foods (which increased by a high-single-digit rate). The traffic and non-food increases demonstrate that their members are spending strongly on both food (which increased by a mid-single-digit pace) and non-food, but they demand lower prices when they spend, which is Costco’s “raison d'être.”
Should our preview be accurate, it would also align with our view that summer and Back 2 School should see healthy growth in consumer spending. These views are also supported by the management commentary and earnings results from J.P. Morgan, Wells Fargo, and Citigroup--all of which reported results this week. Below we share a few relevant comments from the calls, but we’d note that what they are describing was evident in retailer earnings reports from last month. What is new is that delinquency trends for Citigroup’s Retail Services business notably improved, which will be a leading indicator for retailer credit card profitability in the second half of the year, notably for Macy’s and Home Depot.
J.P. Morgan CFO Jeremy Barnum
"You can see a little bit of evidence of behavior that's consistent with a little bit of weakness in the lower-income segments, where you see a little bit of rotation of the spend out of discretionary into nondiscretionary. But the effects are really quite subtle, and in my mind, definitely entirely consistent with the type of economic environment that we're seeing, which, while very strong and certainly a lot stronger than anyone would have thought given the tightness of monetary conditions, say, like they've been predicting it a couple of years ago or whatever, you are seeing slightly higher unemployment, you are seeing moderating GDP growth. And so, it's not entirely surprising that you're seeing a tiny bit of weakness in some pockets of spend. It all kind of hangs together in what is sometimes actually not a very interesting story."
Citibank CFO Mark Mason
"We do expect to see continued volume growth across the branded portfolio (i.e. they expect consumer spending to remain healthy...And, certain pockets of customers continue to be impacted by persistent inflation and higher interest rates resulting in higher losses. However, across...portfolios, we are seeing signs of stabilization in delinquency performance."
Citibank CEO Jane Fraser
"A lot of the spending and the growth areas we are seeing and the underlying numbers is being driven by the affluent customer."
In other encouraging news, the June Consumer Price Index (CPI) was lower month-over-month and down to +3.0% on a year-over-year basis. The downward trend is clear in the graph below.
We’ve been focusing on four areas of inflation: food, shelter, autos, and insurance. Here is the story on each:
- Food: Food-away-from-home increased +0.4% month-over-month and up +4.1% year-over-year. Yes, share-of-stomach will be lost to food-at-home as prices there were relatively flat, and up only 1.1% year-over-year. Prices on most processed foods were lower month-over-month and many were lower year-over-year. , only “commodities” like eggs and butter. This week Pepsi and Conagra reported quarterly results. Pepsi’s North America Beverage business had a -3% volume decline and Frito-Lay North America (Tostitos, Lay’s, Doritos, etc.) saw a -4% volume decline. Revenue growth was roughly even. On its call, Pepsi management acknowledged that some of the Frito-Lay portfolio had become too pricey for some segments of the population, and that “value” would be enhanced for these in the second half of the year: more promotions, lower absolute prices, more value packs, etc. (For reference, Frito-Lay has increased its portfolio’s price/mix by 40% since 2019). Conagra reported a -3.6% volume decline in its Grocery & Snacks segment, as well as a sales decline; however, its Refrigerated & Frozen segment reported a volume improvement of +0.9% YoY as customer responded to their price cuts. Segment revenue was down -3.8%, as Conagra is lowering prices on product. At this point, the fight is over; the Fed and Walmart and Costco have won and processed food prices will move lower in the coming weeks.
- Shelter: As we’ve explained, “owners equivalent rent” (OER) is an “imaginary statistic” that is being driven by the 2022-2023 rent spike. OER for June was up 0.3% month-over-month, putting it at a +5.4% increase year-over-year. (As a reminder, OER is a 27% weight in the CPI. Rent of Primary Residence is only 7.6% and that was up 5.1% year-over-year). Unfortunately, at the current level of increase, the series will run hot in the months ahead.
- Autos: For the month, new vehicle prices declined to a -0.2% year-over-year decline and used fell -10%. New car sales for June were a disappointment, dealer inventories mounting, and "cash-on-the-hood" is piling. Sales declined 4%, electric vehicle (EV) sales grew 4% with Tesla down 9%, hybrid sales gained +29%. Incentives increased to $3,143 versus $2,044 last year. Inventory for the "Detroit 3" is now above pre-COVID levels on a sales-adjusted basis. This means that autos will be deflationary in the coming months (and autos have a high 5.5% weight in the S&P). As goes auto prices, goes insurance, meaning we are heading to the right direction.
- Services and travel have been sources of concern. However, we suspect that last year’s surge in services’ inflation was partially due to a demand-supply imbalance as last year was “peak more travel.” We’ve argued that that was abnormal and that spending on “fun” and “stuff” would be in more balance in 2024. We got affirmation of that this week with Delta CEO Ed Bastian saying that the airline industry put too much capacity up this summer with supply being up +8% (i.e., available seats/routes), whereas demand was looking up only +4%. The epicenter of the imbalance is domestic leisure (i.e., “less fun by the non-affluent”). Delta President Glen Hauenstein shared, “U.S. origin, high-end leisure extending the season through October and into November [is very strong]. Bastian note, “Premium's growing double digit for us and we don't see that slowing down.” What will be the industry’s response – to cut rate and eventually, capacity. For June CPI, airline fares fell 5% month-over-month, taking them to -5% year-over-year. Hotels & motels, down 2.5% year-over-year, the fifth decrease in a row. And so, it looks like the Fed is now winning on “excess or ebullient fun” as well. What’s next? Obviously, interest rate cuts.
