Thursday’s strong retail sales report for November continues the recent pattern of healthy US demand stats. Retail sales growth accelerated meaningfully both in nominal and real terms over the last two months, while consumer confidence has rebounded to near cyclical highs. Given the magnitude of the recent spurt in spending, it is likely that much of this increase was financed by declining savings rates. Stepping back, the latest stats suggest that the gradual normalization of US economic conditions that began years ago is still ongoing and that the slowing that occurred in the third quarter has been reversed. It looks like we are seeing a continuation of what has happened in recent years as balance sheets have gradually healed, savings rates have gradually declined, credit has slowly improved, and levels of employment have become less depressed.
Of course, given this recent improvement, the Fed is now more likely to begin tapering sooner. In our view there are risks in being wrong and doing so before the US economy is ready because any resulting weakness would be hard for the Fed to reverse with their existing tools. That said, the fact that the US economy has continued to make progress makes it more likely that the expansion has become more self-sustaining. And unlike previous attempts to end QE, the Fed is planning to do so much more gradually, which would make it easier to make adjustments.