The Retail sales growth rate was reported at 1.83% on a year-over-year basis. This may be the first economic indicator that shows a slowing pace of growth in retail consumption. The tariffs have hit, and the US consumer is slowing its pace of consumption.
The year-over-year growth rate is still well within the longer-term median ranges and a normalized standard deviation. However, retail sales have been sluggish overall for the past two years on a relative basis. Therefore, today’s move lower comes from a slightly lower level.
The United States is a consumer-driven economy—the GDP numbers tell us that ~72% of the US economy is derived from consumer spending. Tariffs are a tax on consumers. While the new budget is working its way through Congress, it will raise defense spending. However, taxing consumers and using those funds to purchase military equipment is a less efficient way of spending in the economy—you are effectively removing expenditures from the consumer portion of the economy.
Right now, the stock market is more focused on Middle East tensions, so this did not even register as a blip on the radar for stock market participants.
Nonetheless, to fully understand what will happen in the stock market, notwithstanding more near-term geopolitical risks, continually focusing on the overall picture is key.
The Stock Market Today
As of right now, the stock market is contained. There was some overnight selling after yesterday’s relief rally.
Will the current conflict between Israel & Iran amount to much? Has it ever? There is short-term market risk, of course. But, the United States is steaming an additional aircraft carrier to the region—Iran knows this and is going to want to find a peaceful way out of the current tensions.
Mostly, I think the current conflict will blow over very quickly.
After that?
The stock market will move back into a more risk-on position, and that is when economic indicators will take more center stage. Here are things to be more focused on:
The Federal Reserve is in the midst of a 2-day meeting, and the announcement and subsequent news conference will hit tomorrow afternoon.
The tariffs are starting to have an effect on the consumer, and from this, there will be continuing data indicating a slowing in the overall economy.
Eventually, the tariffs will be removed, which would allow the consumer to move ahead with lower-cost expenditures.
The tariffs are meant to add some $425 billion in new tax revenue for the US federal government. Removing the tariffs will create a monstrous hole in the budget.
This is the overall, long-term, big picture I am focusing on. Each piece of economic data will reiterate this. Keeping this in perspective will allow me to make market moves within the markets.
I am faithfully watching the developments in Congress to see what the new bill will look like, while also watching the reaction of the consumer to the tariffs. Along with this, how the courts move is crucial, but this will take a long time.
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