Moneybeat – Retail recovery

MARY REICHARD, HOST: Coming up next on The World and Everything in It: The Monday Moneybeat.

NICK EICHER, HOST: Big jump in retail sales in May, an unexpected rise of 17.7 percent, following a big drop in April of 14.7 percent on top of an 8 percent drop in March. So not quite a full recovery, but certainly better than expectations.

Which is similar to the unexpectedly better jobs numbers that month. Economists thought we’d have a negative month on jobs, but employers surprised them by adding jobs, so it was a net plus.

Well, joining me now is financial analyst and advisor David Bahnsen. David, good morning.

DAVID BAHNSEN, GUEST: Good morning. Good to be with you, Nick.

EICHER: So does that retail number surprise you or impress you in any way?

BAHNSEN: It impresses me in this sense, and it’s very similar to what you said a moment ago about the jobs number.

It’s yet another data point—and there’s others I can provide as well—where the consensus expectation on a recovery, consensus was for something better and it ended up being much, much better, which has now sort of created an expectation that it’s across the board.

They were expecting an 8 percent increase in retail sales, but as you said, it was up 17.7—more than doubling that recovery. So, one of the things I pointed out in my own Dividend Cafe commentary this week is that every category has been outperforming expectations and yet the one category that I think is most important to a sustainable economic recovery is business investment, industrial production, new capital goods orders, manufacturing.

The retail, the mortgages, the shopping, those things we now can see are in a better direction, maybe more consumer-oriented data points. But we definitely need to see some validation on the business data. That won’t come until Q3 and if it does come in strong in Q3, then I’m going to feel a lot better about 2021.

EICHER: Yeah, and of course retail sales is a barometer to look at—and we know that two-thirds of the gross domestic product number is what we spend on goods and services—the figure we call PCEs, personal consumption expenditures. But when you look at the economy, the underlying strength of it, it’s business investment for you.

BAHNSEN: Well, I’m a supply-sider, Nick, and a lot of this is philosophical. None of us can consume unless one of us first produces. That’s, by the way, a theological point as much as an economic one. And we ourselves cannot consume unless we ourselves first produce.

So, it takes two parts production to have one part consumption. And, therefore, I believe all economics starts on the supply side, the production side, the business investment side. And so therefore when businesses are slowing down their production in the economy, that will have a more lasting impact that bodes worse for economic growth and prosperity than when the consumer stops spending money.

Ultimately we know from a generation or two of Keynesian economics and just a kind of cultural phenomenon that the American consumer can spend even when the economy is not good. But what can’t happen is business investing when the economy is in a bad place.

Businesses always slow down when they view a poor opportunity for profit-making activity. When you see business investment into capital expenditures, that then becomes a self-fulfilling prophecy. It speaks to business confidence and it creates a reason for business confidence as future growth is invested into.

EICHER: David, the Congressional Budget Office released GDP estimates—second quarter, which ends in a little over a week, Q2 is going to be terrible, close to 40 percent down, unprecedented figures. Followed by two quarters of recovery, Q3, Q4, the second half of the year will be up but up not nearly enough to make up for the losses of April, May, and June.

What’s your read? Do these predictions mean anything to you?

BAHNSEN: It doesn’t mean anything to me and the reason is just because its predictive values don’t mean anything. See, there’s four major categories of what goes into GDP growth, so, there’s four or five variables. Well, no economist is going to get four or five things right. And everyone’s making their predictions and filling their models based on things we’ve never gone through before that are totally unprecedented.

Ultimately what people need to know is where Q3 GDP is going to be on the upside. First of all, there’s going to be a lot of political ramifications because I think that if President Trump is running for reelection with a Q3 that’s recovering at 8 or 9 percent, that’s going to be very muted and it’s going to hold us into recession conditions relative to where Q2 is blended. But if Q3’s coming back plus 20 percent, then all of a sudden you’re looking at a real V-shape type phenomena, even if not all sectors are V-shaped. Some are going to peter out a little at the end of the year. It’s going to feel more like a V-shape recovery in the economy.

EICHER: Financial analyst and advisor David Bahnsen. David, thank you.

BAHNSEN: Thanks for having me Nick.

(AP Photo/Nati Harnik) A Target employee returns shopping carts from the parking lot, in Omaha, Neb., Tuesday, June 16, 2020. 

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