One of the most underrated economic indicators in financial markets, Retail Sales, is due today in the US. Unsurprisingly, the consensus is for a double-digit decline (-12%) in comparison with the previous month. In a way, it reflects the uncertainty about not only now, but also the future. As consumers hold on to their finances and are reluctant to spend, amidst the biggest unemployment crisis in US history.
The number of consumers spending less has skyrocketed from 32% to 51% – with terrible implications on the economic growth moving forward. Here is why: consumer spending makes up about 70% of the US GDP
Consumer Spending – Key to Economic Growth
Investors and traders focus on central banks’ actions to gain an insight into the future path for interest rates. Armed with that knowledge, they buy or sell currencies, equities, or other financial products to speculate on their information.
Investors are aware that central banks use economic developments to base their interest rate decisions. The Fed in the United States has the mandate to create jobs and stabilise currency rates. Hence, jobs data and inflation data are key for the Fed.
Besides the obvious data that makes up the mandate, Retail Sales or any other consumer focused report is of extreme importance – not only because of the huge share of the US GDP but because of the central role the consumer has in the overall economic growth.
When inflation rises and threatens to break the central bank’s target, the reaction is to hike the rates. The indirect message is to stop consumers from spending so much and so fast and offer another alternative for their money – savings. This way, the velocity of money in the economy slows down, and, eventually, inflation slows too. Hence, the behavior of consumers’ is a critical aspect to monetary policy actions.
What we see in the United States nowadays is a generalized phenomenon throughout the world. The coronavirus pandemic changed everything for households – day to day travel, vacations, home or car purchases have all been put on hold.
Consumers need clarity, and, above all, job stability to boost spending. until this returns, consumers are likely to remain reluctant to spend. Therefore, the numbers above could get worse before they get better in the weeks/months ahead.