The US Retail Sales Outlook - Tax Adminrising employment, real incomes, and household wealth. • Business fixed investment will benefit from strengthening global markets and an easing

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.

US Economic Outlook

The US Retail Sales Outlook September 20, 2017

Economics and Country Risk

Patrick Newport, Executive Director – US Macro & Global Economics +1 781 301 9125 [email protected]


The US economy on a solid growth path

•  Real GDP growth picked up from an annual rate of 1.2% in the first quarter to 3.0% in the second quarter as consumer spending accelerated.

•  Hurricanes Harvey and Irma have disrupted economic activity in the third quarter, but recovery and rebuilding will boost growth in subsequent quarters.

•  Consumer spending continues to drive US economic growth, supported by rising employment, real incomes, and household wealth.

•  Business fixed investment will benefit from strengthening global markets and an easing of regulatory policies, although commercial building is slowing.

•  Increasing demand, low inventories of homes for sale, and rising prices will encourage more homebuilding, even as interest rates rise.

•  The Federal Reserve will gradually raise interest rates (taking the federal funds rate to 3% in late 2019) and reduce its asset holdings.

•  The economy’s long-term potential growth rate is near 2%.

•  A recent rise of the softer numbers is noticeable after the presidential election.

2

US Economic Outlook / September 2017


Harvey and Irma will dampen GDP in the later half of 2017 and boost it in the first half of 2018

•  Hurricanes Harvey and Irma have disrupted economic activity in the third quarter, but recovery and rebuilding will boost growth in subsequent quarters

•  The extent of the reduction in GDP growth during the third and fourth quarters and the subsequent rebound during the first half of next year will depend on the extent of damage to key segments of the impacted economies and how quickly the reconstruction efforts can get under way

•  Personal income will take a direct hit from Hurricane Harvey and Irma due to the lost wages of displaced workers as will real spending growth; real residential investment growth is expected to turn positive in the 3rd quarter


Consumer sentiment is upbeat, supported by improving household finances

4

50

60

70

80

90

100

110

120

1980 1984 1988 1992 1996 2000 2004 2008 2012 2016

196

6 =

100

University of Michigan Index of Consumer Sentiment

Source: University of Michigan Surveys of Consumers © 2017 IHS Markit



Consumer sentiment by household income

50

60

70

80

90

100

110

120

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Income < $75,000 Income > $75,000

Consumer sentiment by household income

Source: University of Michigan, IHS Markit © 2017 IHS Markit

1966

= 1

00

5



Consumer confidence is riding high

20

40

60

80

100

120

140

160

1980 1984 1988 1992 1996 2000 2004 2008 2012 2016

Inde

x, 1

985

= 10

0, S

A

Conference Board Consumer Confidence Index

Source: Conference Board, IHS Markit © 2017 IHS Markit

6



US small business sentiment soared after the November 2016 election and remains high

7

80

85

90

95

100

105

110

1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017

198

6 =

100

NFIB index of small business optimism

Source: National Federation of Independent Business © 2017 IHS Markit



US stock prices have reached new highs in 2017

8

0

500

1,000

1,500

2,000

2,500

1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Inde

x, 1

941-

43 =

10

S&P 500 stock price index

Source: IHS Markit © 2017 IHS Markit



0

5

10

15

20

2002 2004 2006 2008 2010 2012 2014 2016 2018 2023

Mill

ions

Light trucks Automobiles Source: IHS Markit Economics, BEA

US light-vehicle sales have reached their peak; light trucks will continue to outsell cars

Total light vehicle (automobiles + light trucks) unit sales, SAAR

US Macro and Consumer Markets Outlook / September 2017

9


0

10

20

30

40

50

60

2004 2006 2008 2010 2012 2014 2016

Thou

sand

s of

201

6 do

llars

Real median household income made strides in 2015 and 2016

Real median household income

10



Interest rates will continue to rise as the Federal Reserve normalizes monetary policy

0

2

4

6

8

10

12

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020

Perc

ent

Federal funds 10-year Treasury 30-year mortgage BAA corporate

Interest rates



11


Poverty rate pushed lower in 2015 and 2016

10

11

12

13

14

15

16

1984 1988 1992 1996 2000 2004 2008 2012 2016

Perc

ent

Percent of people below poverty level

12



Household financial and real estate assets are rising

13

0

10

20

30

40

50

60

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Trill

ions

of U

SD

Equities Other financial assets Nonfinancial assets (includes real estate)

Household asset holdings




-10

-5

0

5

10

15

Lowest quintile

Second quintile

Third quintile Fourth quintile

Highest quintile

Top 5 percent

Perc

ent c

hang

e, 2

016

dolla

rs

2008-13 2008-14 2008-15 2008-16

Incomes pushed past prerecession levels for most households

Real mean household income by quintile

14



-1

0

1

2

3

4

5

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Year

-ove

r-ye

ar %

cha

nge

Employment Cost Index, wages & salaries Consumption deflator

Wage gains will continue to outpace inflation

15

Wages and prices




Forces affecting consumer spending

Positive forces • Employment growth

• Wage acceleration

• Rising asset values

•  Income tax cuts in 2018

• Expansion of e-commerce

Negative forces • High student debt burdens

• Saving for retirement

• Asset and income inequality raises aggregate saving

16



The consumer market environment is favorable

17

Consumer market indicators Percent change 2016 2017 2018 2019 Real consumption 2.7 2.7 2.8 2.6 Real disposable income 1.4 1.5 3.5 3.2 Real household net worth 4.6 4.3 2.5 1.9 Payroll employment 1.8 1.5 1.5 1.2 Real wage rate 1.1 1.0 1.6 1.4 Consumption price deflator 1.2 1.6 1.3 1.9 Light-vehicle sales (Millions) 17.5 17.0 17.2 17.0 Single-family home sales (Millions) 5.39 5.58 5.71 5.65 Source: IHS Markit © 2017 IHS Markit



The retail sales outlook

•  Retail sales rose 0.6% in July. Sales excluding autos and gasoline were up 0.5, and there were upward revisions to May and June.

•  Retail sales gains were broad-based. Major gainers were autos, auto parts, furniture, building materials, grocery, health, sporting goods, general merchandise, department, nonstore (mostly online), and restaurants.

•  Major losers were gasoline stations, electronic stores, and clothing outlets.

•  Department stores grew a whopping 1.0% in July after taking hard hits in May and June. Online sales did extremely well, partially thanks to Amazon Prime Day (mid-July).

•  There were upward revisions to retail sales used to estimate consumer spending in May and June, and July came in stronger than expected.

•  Our forecast calls for growth of 4.3% in back-to-school retail sales this year compared to last year, which would be the strongest growth since 2014. We define back-to-school sales as not-seasonally-adjusted retail sales excluding motor vehicles, gasoline, and food services for July through August.


18


-6 -4 -2 0 2 4 6 8 10 12

Restaurants

Non-store retailers

Miscellaneous store retailers

General merchandise

Sporting goods and hobby

Apparel stores

Health and personal care stores

Food stores

Building materials

Electronics

Furniture and home furnishing

Total retail sales

Percent change, current dollars 2016 2017 2018 2019

Retail sales outlook

Retail sales outlook


19


Total retail sales

-15

-10

-5

0

5

10

1995 1999 2003 2007 2011 2015 2019

Perc

ent c

hang

e fr

om a

yea

r ear

lier

Total retail sales


20


E-commerce share of retail trade jumps in second quarter


21

6.2 6.3 6.5 6.6 6.9 7.1 7.3 7.5 7.8 8.0 8.2 8.2 8.5 8.9

0

2

4

6

8

10

2014 2015 2016 2017

E-commerce share of total retail sales less restaurants

E-commerce share of retail sales jumps in second quarter

© 2017 IHS Markit Source: IHS Markit

Perc

ent

E-commerce share of retail sales jumps in second quarter E-commerce share of retail sales jumps in second quarter E-commerce share of retail trade E-commerce share of retail sales jumps in second quarter

X-axis label


Holiday retail sales growth to see best year since 2014


22

2.7

-4.6

0.2

5.2 4.6

2.6 2.9

5.0

3.2 3.6 4.3

-6

-4

-2

0

2

4

6

2007 2009 2011 2013 2015 2017(f)

Holiday retail sales


Perc

ent c

hang

e fr

om a

yea

r ear

lier

Notes: NSA November and December total retail sales less auto dealerships, gasoline, and food services


Online holiday retail sales growth to be fastest since 2009


23

9.6

-3.0

13.8 12.6

13.6

9.7

5.2

13.4 12.9 12.8 13.7

-6

-3

0

3

6

9

12

15

2007 2009 2011 2013 2015 2017(f)

Online holiday retail sales


Perc

ent c

hang

e fr

om a

yea

r ear

lier

Notes: NSA November and December electronic shopping and mail order retail sales


Ecommerce takes a bigger bite out of retail sales


24

11.6 11.8 12.1 12.2 12.6 13.0 13.3 13.5 13.9 14.3 14.8 15.0 15.5 16.0

0

3

6

9

12

15

18

2014 2015 2016 2017

E-commerce share of total retail sales less restaurants, food and beverage stores, auto dealers, and gas stations

E-commerce share of retail sales jumps in second quarter


Perc

ent

E-commerce share of retail sales jumps in second quarter E-commerce share of retail sales jumps in second quarter E-commerce share of retail sales


Back-to-school retail sales growth


25

7.2

5.2

3.4

0.7 -5.8

3.3

5.7

2.8

4.4 5.1

3.9 3.6 4.4

-6

-4

-2

0

2

4

6

8

2005 2007 2009 2011 2013 2015 2017(f)

Back-to-school retail sales


Perc

ent c

hang

e fr

om a

yea

r ear

lier

Notes: NSA July, August, and September retail sales excluding motor vehicles, gasoline, and food services


Online back-to-school retail sales growth


26

15.6

12.7 11.8

3.6 2.1

11.3 10.7 12.0

6.8

11.4 12.0 13.2 13.0

0

3

6

9

12

15

18

2005 2007 2009 2011 2013 2015 2017(f)

Online back-to-school retail sales


Perc

ent c

hang

e fr

om a

yea

r ear

lier

Notes: NSA July, August, and September electronic shopping and mail order retail sales


Online share of holiday retail sales


27

0

4

8

12

16

20

1992 1996 2000 2004 2008 2012 2016

E-commerce share of holiday retail sales


Perc

enta

ge


Retail sales: motor vehicle and parts

130

170

210

250

290

330

370

1995 1998 2001 2004 2007 2010 2013 2016 2019

Bill

ions

of d

olla

rs

Retail sales: motor vehicle and parts, SA


28


General merchandise subcategory sales

0

20

40

60

80

100

120

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Bill

ions

of d

olla

rs

Department Stores Warehouse Clubs & Superstores Dollar & Other

Retail sales: general merchandise by subcategory, SA


29


Clothing store subcategory sales

0

2

4

6

8

10

12

18

20

22

24

26

28

30

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Bill

ions

of d

olla

rs

Family (left axis) Men (Right) Women (Right)

Clothing store sales, SA


30


Online shopping retail sales

20

30

40

50

60

70

Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17

Bill

ions

of d

olla

rs

Seasonally adjusted Nonseasonally adjusted

Electronic shopping and mail order sales


31


Retail sales: e-commerce retail

0

20

40

60

80

100

120

140

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Bill

ions

of d

olla

rs

E-commerce retail sales, SA


32


E-commerce retail share expanding

0

5

10

15

20

2001 2003 2005 2007 2009 2011 2013 2015 2017

Perc

ent

E-commerce retail share of total retail sales excluding food, gas, and autos, SA



33


Clicks outpacing the bricks

0

10

20

30

40

50

2004 2006 2008 2010 2012 2014 2016

Bill

ions

of d

olla

rs, S

A

Electronic shopping and mail order Department stores

Department and online stores retail sales


34


1.35

1.40

1.45

1.50

1.55

Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17

Retailer inventories still fairly high

Inventory/sales ratio


35

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The US Retail Sales Outlook - Tax Adminrising employment, real incomes, and household wealth. • Business fixed investment will benefit from strengthening global markets and an easing