By Garrick Brown, Vice President of Research – West Region
Last week, just as the stock market was RollerCoastergoing off a cliff, new numbers from the Conference Board indicated that U.S. consumer confidence had skyrocketed in August. Their reading was done earlier in the month (before any of the turbulence on Wall Street) and indicated an uptick of 10.5 points from a revised July 2015 reading of 91.0 to 101.5. This was the best showing since January. Of course, their survey closed August 13th… or about a week before the plunge on the stock market.
Writing about what is happening on Wall Street is, to say the least, challenging. It’s not that hard to understand what is going on, or why… however, for the next few weeks (if not months) we are likely going to be dealing with levels of volatility that mean blogs and newsletters like mine will always seem to be significantly behind latest developments. For example, last Tuesday the market saw a bull, then bear, then bull runs again. I was speaking at an event last Thursday and was away from my monitor for six hours. In that time, the Dow ran up over 350 points as I was giving a speech as to why the market had dropped. I am nearly complete with this week’s version of Newsline but even mentioning where the Dow Jones is right this second (16,529 and down -114 points on the day) hardly makes sense because it takes a couple of hours to format this publication before it is released. By the end of trading today those numbers could be higher, could be lower… who knows. Just so you know for context sake, the Dow peaked above 18,000 points and mostly stayed there from February to July. It was near 17,600 points earlier this month when this latest period of volatility began. And all we know for sure is that this period of volatility continues today and probably isn’t going away in the next few weeks.
This is despite the strong economic indicators that came in last week for the US economy. Q2 GDP growth was revised upward to an extremely robust 3.7%. The economy added a solid 215,000 jobs last month. And both US personal income and spending both showed growth in July as well. Those are the factors that drove this surge in consumer confidence. Just as the volatility of Wall Street is almost assuredly going to be behind (what I forecast) a similar drop in consumer confidence come next month’s reading.
So here is the deal… When it comes to the family of economic indicators out there… you cannot ignore the stock market. But it is the most manic depressive of all of the economic indicators you could choose. It is the equivalent of the crazy cousin you never hear from… except for calls in the middle of the night. And those calls are only seemingly to either tell you about how great things are…how he found the love of his life… how he is making money hand over fist at the new job… or they are calls to ask you for money because he is living behind the 7-Eleven in a Dodge Dart.
So what’s it all about? Well, first off, I think it important to keep in mind what has set this entire chain of events off and that all comes down to events in China. But let’s not forget that a lot of investors here were looking for an excuse for a sell off. One of the most frequently asked questions I have been getting over the past year has been, “is there a bubble and when will it burst?” Despite the fact that PE ratios have been nowhere near bubble levels, that question has persisted. After a seven year run up in stocks, a lot of US investors were looking to cash in their chips and get out. This provided them with that. But let’s get back to China…
China’s economy is actually doing alright. Wages are growing at 10% and job growth numbers still look healthy. They are also making progress transitioning into a service-based economy. 50% of China’s GDP is now linked to services sector and it is doing well.
The devaluation of their currency starting a few weeks ago was largely misunderstood. It was not a panic-driven decision by the Chinese central bank. The 4% drop in the Yuan was simply due to a policy change. China is trying to allow their currency to float. The reason is that they badly want to be allowed into the IMF’s special drawing rate basket (right now there are only 4 currencies: US dollar, euro, pound sterling, and the yen. The IMF has said China needs to show that their financial markets are more liberalized. Yes, it is true that by allowing the Yuan to be weakened against the dollar, that this will spur exports. Bad news for US companies that export to China but great news for companies that import from China and for US consumers. Ironically, a 4% fluctuation in currency would normally not be a huge deal… but in this case it rattled Chinese investors and the instability in their major stock indices translated into volatility in Europe and then Wall Street.
But back to the concerns over the Chinese economy… it is the second largest in the world, so we don’t want to underestimate its impact. But direct US investment in China is actually very small. It comes out to about $65 billion versus $6 trillion US invests globally. US banks are not overly exposed; our investment in China comes out to just $100 billion (less than 1% of US bank assets held globally). And, keep in mind that US core inflation hasn’t been impacted by developments in China in over 20 years. Asian economies still have a boatload in foreign exchange reserves = 25% of GDP and still have lots of room to stimulate their local economies if they need to.
All of this means that the chances of a Chinese economic collapse are virtually nil. Run from anyone who tells you otherwise. And it also means that the direct impact on the US economy should be minimal… but what we are watching on Wall Street is the indirect impact. And, unfortunately, investor jitters can turn into something real. That risk was greatest a week ago and we have already had numerous waves of run-ups as long-term investors have swarmed the market looking for sell-off deals. This back and forth activity is bound to continue for a while as new developments arise.
Ironically, much of it might turn out to be good for the US consumer. Keep in mind that we are still basically in garden variety stock market correction territory (in fact, at the peak of some of the more recent rallies we have fallen below the 10% standard generally used for that definition). A correction is not necessarily a bad thing. Remember, what is best for the economy in the long-run has nothing to do with the actual pricing of assets themselves. It has to do with pricing in relationship to the underlying fundamentals. If prices are sky high but the underlying fundamentals of a company support them (it’s all about PE ratios folks), then we’re golden. It’s when pricing gets ahead of those fundamentals that we see bubbles forming and it is in bursting bubbles where we see recessions. There was no bubble here yet, though a decent argument exists that one was beginning to form. An actual correction here could mean a re-alignment with underlying fundamentals and the stage set for an even longer expansionary period.
Meanwhile, the slowing Chinese economy and continued shift towards a service economy means less demand for oil. This is a net positive for US consumers. As is the stronger dollar, which means they will have more buying power.
Lastly, good economic news in the US should have guaranteed the Fed would raise interest rates in September. But global volatility probably means that is shelved. I might have to eat my words here as it is clear that they are itching to raise rates. But I have a hard time believing that with all of the risks involved and the potential blowback (yeah, I know they are supposed to be above politics but I am not sure that is possible) that we aren’t going to see that can kicked down the road further. Last Monday (when the Dow had just plummeted 1,000 points) I would have told you that rate hikes are off the table until 2016. With all the strong economic news that came in last week and the stock market rallying to regain most of that, I would have to say that December increases are probably still on the table now. Regardless… this all benefits US consumers.
Yet, will it show in next month’s consumer confidence numbers? Fat chance… we may see those dropping in the months ahead even as spending continues to increase.
In the meantime, if you’re interested in my latest installment of weekly notes on Who is Doing What in Retail, click here.
This post is commentary from the latest weekly edition of our Cushman & Wakefield Retail Newsline, which you can subscribe to for free by e-mailing firstname.lastname@example.org.
Garrick joined Cushman & Wakefield (formerly DTZ / Cassidy Turley) in October 2010. He serves as Vice President of Retail Research for the Americas. He speaks frequently at industry events and has been a keynote speaker at symposiums, conferences and market forecasting events for groups like the Appraisal Institute, Urban Land Institute, CREW, ICSC and PRSM. He is also a member of Lambda Alpha International, an invitation-only land use society for those who are involved in the ownership, management, regulation and conservation of land, but also those who are involved in its development, redevelopment and preservation.