Our Drunken Sailors Push Back Against Rate-Cut Mania

Armed with income increases that outran inflation by a wide margin in 2023, they continue to splurge, no matter what.

Total retail sales jumped by 0.6% seasonally adjusted in December from November, and by 5.6% year-over-year, to $710 billion. Not seasonally adjusted, retail sales jumped to $771 billion, according to Census Bureau data today.

Despite price drops in many goods that retailers sell. These sales increases come despite price declines across many goods that retailers sell, especially durable goods and gasoline, while inflation has moved solidly into services [We discussed this in detail: Beneath the Skin of CPI Inflation: Not in the Mood to Just Go Away]. So adjusted for the negative inflation rates in many of those goods, retail sales would have jumped even more. This will crop up in the inflation-adjusted consumer spending and GDP data.

Here, for our charts, we’ll use three-month moving averages; they curtail the artificial headline-drama of the monthly squiggles; and they bring out the trends. The three-month moving average of total retail sales rose by 0.2% for the month and by 3.9% from the same period a year ago. Note the slowdown a year ago, and again in the spring of 2023:

Some retailers keep hitting it out of the ballpark, particularly ecommerce and restaurants & bars. Motor vehicle dealers came out pretty good too, as did some other retailers.

But other types of brick-and-mortar retailers are coming off the pandemic bubble, such as Building Materials stores. And others are in permanent decline, such as department stores, furniture stores, and electronics stores: Consumers are buying this stuff now massively online rather than at the brick-and-mortar stores – a phenomenon that has produced what I’ve called since 2016, the Brick-and-Mortar Meltdown, where I’ve documented some of the biggest mall failures and retailer bankruptcies, of which there have been hundreds, from the biggest one (Sears Holding) on down.

Hallmark of our Drunken Sailors.

Americans are now spending vastly more money eating and drinking out than at grocery stores; and they’re pushing this trend to the next level, eagerly paying for the “experience” or the convenience. They could save a lot of money by eating at home or packing lunch, but no, our Drunken Sailors – as we’ve come to call them lovingly and facetiously because – gotta have some fun.

In the chart below, shows sales by “food services and drinking places” (red) and sales by “food and beverage stores” (blue). The amount spent eating and drinking out is astounding, and it keeps shooting higher, even as sales at food and beverage stores have essentially flatlined after the pandemic price-spike ended:

Where does this money come from? Surging real incomes.

Per-capita disposable income, adjusted for inflation (total income from all sources minus payroll taxes, adjusted for inflation), jumped by 4.3% year-over-year. In other words, disposable income is outrunning inflation by 4.3%, after having falling behind inflation in 2021 and 2022.

This surge in real income is what fuels the spending binge. And yet, consumers are still saving part of their income. Maybe they aren’t drunken after all, they’re just earning a lot more money?

Our Drunken Sailors are pushing back against rate-cut mania.

Consumers are in no mood to slow down, very obviously. There is no landing at all. They’re cruising in the stratosphere. They’re earning more than ever, and they’re saving some of it, and they’re blowing the rest, and therefore are continuing to help fuel inflation. They’re heavily leaning against the rate-cut mania that inexplicably broke out on Wall Street in November.

The Fed is watching this nervously. The Fed’s rate cut views – maybe three later this year, it indicated – were all prefaced by, and premised on, inflation going back toward its 2% target. But our Drunken Sailors keep splurging as if they were trying to make sure that inflation will not do that, that it will stay high, and maybe go even higher, so…..

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