Key Takeaway
The US consumer might be set for an unexpected lift in purchasing power.
Firstly, while average earnings remain subdued, US employment conditions
appear to be improving. Indeed, some surveys suggest that earnings are
growing much faster than the 'average' (see Exhibit 5). Secondly, Household
wealth continues to grow annually at double digit levels.
Thirdly, China's slowing economic growth is already making a dent in global
commodity demand. In particular, oil prices have slipped as China's import
demand has flagged. Fourth, imported prices for overseas goods have fallen
helped by excess supply in emerging markets and a firmer dollar. The stronger
dollar tends to reduce the price of imported garments, technology goods as
well as household furnishings.
‘A bargain is something you can’t use at a price you can’t resist’, Franklin Jones
‘We used to build civilizations. Now we build shopping malls’, Bill Bryson
The US is no different than Japan or Germany where companies have made
significant productivity gains during the past two decades but wages have
remained static. The productivity gains from globalization, automation and leaner
inventory management has been passed mostly to shareholders or companies which have
lowered their debt levels (see Exhibit 4). Although US headline wages do not appear to
be growing, a glance at some of the hiring data suggests much tighter labor markets (see
Exhibits 10-12) .
Interestingly, thousands of miles across the Pacific, China’s economic slowdown
from plus 8% growth to around 7% has caused a reverberation in commodity
markets. In Aug., China's industrial production slumped to a six year low. Value added
industrial output rose by almost 7% but down from 9% in July, the lowest rate of change
since Dec. 2008. Net commodity demand has been slipping through 2014 (see Exhibits
24-29). Falling commodity prices are likely to provide a one-off boost to US real incomes.
Furthermore, imported prices of goods into the US have been slipping due
to weaker demand in Europe and emerging markets. The stronger dollar is also
making the price of imports ‘cheaper’. Household wealth net worth jumped US$1.4 trillion
in the second quarter helped by higher stock prices and resilient house prices. Consumer
sentiment surveys such as the University of Michigan have continued to climb from their
2008 lows (see RHS chart).
The bottom line is that the US consumer is set to benefit from a tailwind
of falling commodity prices, a strong dollar and record household wealth.
We would argue that labour markets are tighter than surveys suggest. Importantly,
analyst earnings are on the whole being revised up alongside firming share price target
prices. However conviction levels are still quite weak given the low percentage of ‘Buy’
recommendations. On the sector, we are turning more favorable on the US consumer for
the first time in a year.
Within the Jefferies universe of retailing stocks, those that have more than double digit
upside and a strong earnings upward revision during the past quarter include ClubCorp
(MYCC, Buy, TP: US$30.0), American Eagle Outfitters (AEO, Buy, TP: US$20.0),
Under Armour (UA, Buy, TP: US$80.0) and Foot Locker (FL, Buy, TP: US$66.0).
A wider list is shown in Exhibits 1-3. Our S&P 500 target of 1,950 has been surpassed and
we would expect the next few weeks to offer a more attractive entry point.
Jefferi