A tale of two Christmas’

The 2016 Christmas run up saw the shares of retailers ( tracked by XRT, first chart ) rise an anaemic 1%, while in 2017 the same stocks BOOMED, soaring some 5.17 during the last two weeks of December. Why?

Well, MasterCard reports record Christmas spending of some $800B this year. In fact, this was single largest Christmas season on record. So what’s going on?

Well clearly the American consumer is back, with consumer confidence soaring to a 17 year high. Feeling more comfortable about the economy, the best job prospects for a decade, wages rising for the fastest in a decade and amid the promise of falling bills for a majority of taxpayers, the American consumer drove spending this Christmas season to record levels. This is important as some 70% of US GDP is driven by consumption. Higher consumption means likely higher GDP. I spent yesterday reviewing economic forecasts from about a dozen Investment Banks and some optimists are suggesting 2018 could see at least one quarter of 5% GDP growth, annualised ( and clearly nominal ).

A rough approximation to 1Y forward GDP is the sum of CPI and the yield on the US 10Y; with CPI running at 2.2% and the 10Y yield about 2.45% we see this approximation suggests 1Y look ahead US GDP of about 4.6%. Things are heating up, but anyone reviewing forward looking metrics of inflation already knows this; inflation isn’t as benign as the ( heavily manipulated ) index would suggest

So where goeth US GDP? Well, with Consumer Debt Service still at a manageable 5.48% and wages increasing amid an environment where some 85% of Americans will see their tax bills falling, it seems there is plenty of upside. Another factor is Americans new enthusiasm for charging it. Looking at Debt Service as a percentage of Disposable Income, we see American’s credit cards have a ways to go before they max out ( chart below ).

I suspect we’ll see US GDP topping out at close to 5% before it falls back. Oh yeh !! This is the third consecutive quarter of 3% plus US GDP.

Comments are closed.