The Contrarian's Favorite Indicator, and What It Actually Measures - Part 3

If you haven't read Part 1 and Part 2 of this topic yet, please do so before continuing here.

Watch what they do

The July retail print looked poor on the surface: headline down 0.6%, control group down 0.4% against expectations of a 0.4% gain, real retail sales down 0.7%. The composition tells a more specific story. Nonstore retailers fell 2.2%, the largest decline of any category, largely because Amazon shifted Prime Day from July to June with Walmart and Target running competing promotions in the same window. That's spending pulled forward, not spending lost. Autos fell 1.8% and petrol stations 0.9%, the latter alongside falling energy prices. Restaurants and bars, the only services category in the report, rose 0.5%.

Zoom out and the level is intact even as the rate of change decelerates. July sales were up 5.0% year over year and the May through July period up 6.3%. What has changed is composition. EY-Parthenon characterized the report as pointing to a more discerning consumer, with softness in petrol, electronics, recreational goods and grocery suggesting households are becoming more selective and value-conscious. KPMG noted trading-down behavior is climbing the income ladder and now reaching upper-income households, with services holding up while big-ticket purchases lag.

Between monthly prints, the higher-frequency reads are more useful than the surveys. Consumer discretionary versus staples relative strength updates daily and reflects capital actually committed rather than opinions volunteered. Revolving credit growth, card and auto delinquency rates and the savings rate describe capacity to keep spending, which constrains outcomes more than mood does. And guidance from consumer-facing companies arrives with trade-down and traffic commentary no aggregate series captures.

Where that leaves the current setup

The three numbers at the top stop looking contradictory once the construction of each is clear. Sentiment measures how households feel about conditions they've already lived through, filtered through inflation experience and, increasingly, political identity. Retail sales measure what households did last month, distorted this time by a promotional calendar shift. The index measures what a global pool of capital is willing to pay for future earnings, in a month where July CPI came in soft. Three different questions, three different answers, no contradiction requiring resolution.

What's observable is a set of conditions: the soft and hard data have diverged for roughly four years, the Expectations Index has sat below its recession threshold for 18 months without confirmation, spending has continued to grow year over year, and its composition is shifting toward value. The confirmations that would change that picture sit in the hard data rather than the surveys. Consecutive negative months in the control group rather than one calendar-distorted print. A labor differential crossing into negative territory. Delinquencies accelerating rather than drifting. None of those has happened yet.

The final August Michigan reading lands on 28 August, with the next Conference Board print at the end of the month. Both are worth reading. Neither is worth trading.

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