Shoppers are propping up the economy. What if they stop spending?

Posted February 17, 2019 5:12 a.m. EST
Updated February 17, 2019 11:51 p.m. EST

— 1. Negative feedback loop: The American shopper — the MVP of the national, if not the global, economy — is suddenly showing signs of fatigue.

Core retail sales plummeted 1.7% in December, the most in nearly two decades.

Blame the December stock market chaos. Or the beginning of the government shutdown. Or even "glitches" in the data, as White House economic adviser Larry Kudlow did last week.

No matter the cause, the apparent abrupt shift in spending sent economists scrambling to mark down their forecasts for growth. Goldman Sachs trimmed its fourth-quarter GDP estimate to 1.9%. Bank of America slashed its forecast to 1.5%.

Worse, the New York Federal Reserve's "Nowcast" model for first-quarter growth has been halved to just 1.1%.

It's a stark reminder of how it's not just the likes of Amazon, Macy's and Best Buy that depend on American shoppers.

"The US consumer is holding the global economy on its shoulders," Peter Boockvar, chief investment officer at Bleakley Advisory Group, wrote in a report late last week.

That might sound like an overstatement. But recall that consumer spending makes up two-thirds of the US economy, which is the world's largest. China is dealing with a sharp slowdown, Germany's annual growth is at a five-year low, Brexit continues to weigh on the United Kingdom and Italy is in recession.

"We better hope it was a one-month outlier and that the rebound in stocks ... will revive consumer spending," Boockvar said.

Perhaps it shouldn't be shocking that Americans reined in spending at the end of 2018.

Not only was Washington barreling toward what would become the longest partial government shutdown in US history, but the once-booming Nasdaq crumbled into a bear market. Recession worries, which in hindsight look overdone, caused the S&P 500's worst December since the Great Depression.

The retail weakness shows how recession fears can become a self-fulfilling prophesy. There's a feedback loop, both positive and negative, between consumers and the market. High stock prices embolden shoppers to spend — and vice versa.

Bank of America US economist Michelle Meyer said a sharp deterioration in consumer sentiment amounted to the biggest "negative confidence shock" since 2011.

"The consumer is starting off 2019 on a shaky footing," Meyer wrote to clients late last week.

Goldman Sachs chief economist Jan Hatzius warned that the magnitude of the decline in retail sales "raises the risk that the underlying pace of consumer spending growth has fallen significantly."

But Hatzius believes the December retail wreck may prove to be an outlier because January economic reports point to a rebound.

Thankfully, the government shutdown drama is over and the stock market is on fire.

Boosted by the suddenly-patient Federal Reserve and US-China trade talks, the S&P 500 notched its best 30-day start to a trading year since 1991, according to Bespoke Investment Group. The Nasdaq has surged 12% so far in 2019. And the Dow is just 4% below the October 3 record high.

In other words, the confidence shock should be wearing off, paving the way for a rebound in consumer spending.

But beware of the next market storm. If it lasts long enough, it might just be enough to topple the economy.

2. Buffett watch: Berkshire Hathaway is expected to report earnings next Friday. If history is a guide, Warren Buffett will release his annual shareholder letter the next day.

Buffett's letter is closely read for its investment advice. This year, the memo will be mined for insight on slowing economic growth in the United States and around the world, and what it means for companies and markets.

A smaller tidbit that could also be explained: Last week, Berkshire revealed that it sold its entire $2 billion stake in Oracle after holding the investment for just one quarter.

3. More food earnings on the menu: It's another stacked week for food earnings. Domino's, Jack in the Box, Wendy's and Dine Brands, owner of IHOP and Applebee's, are all on deck.

Other fast food and fast casual restaurants have discussed how digital investments, delivery programs and menu innovations played out in 2018. Expect these companies to do the same when they report results.

For Domino's, digital and delivery has been a strength, and a way to try to keep an edge over competitors like Pizza Hut. A few weeks ago, Domino's announced a limited-time initiative that uses artificial intelligence to reward people when they buy pizza — even if it's from a competitor. Investors may want to know how digital efforts like that one paid off last year.

4. Coming this week:

Monday — US markets are closed for Presidents Day

Tuesday — HSBC and Walmart report earnings

Wednesday — CVS, Jack in the Box and Cheesecake Factory report earnings

Thursday — Deutsche Telekom, Barclays, Baidu, Domino's, and Wendy's report earnings

Friday — Berkshire Hathaway earnings