It’s probably a good thing the government partially shut down in December. It delayed the exposure of some dreary economic updates in the face of a falling stock market.

Retail sales figures for the important holiday month were finally updated last week, and they were terrible.

Excluding auto and gasoline, sales were expected to rise 0.4% but dropped 1.4% on the month!

That was the sharpest drop since September 2009 when the U.S. economy was in a recession.

Traders sold stocks in reaction to the dismal sales figures. But the hope of a trade deal with China kept stocks afloat and they ended the day on a mixed note. Treasury bond yields dropped slightly before steadying. At time of writing, long-term bonds were still hovering around 3%.

Still catching up…

We still don’t know when the updated retail sales figures will be released for January, February, or March.

I’m guessing the Census Bureau and the Bureau of Economic Analysis (BEA) will be all caught up with the delayed economic reports by the end of next month.

The BEA will update fourth quarter 2018 gross domestic product (GDP) on February 28. It was originally scheduled for January 30, and it will now include the first and second estimates of the data.

And those dismal December retail sales figures will surely impact fourth quarter GDP. I’ll be watching for that release and considering the impact it could have on the markets.

Growth rate adjusted way down…

Last Thursday, the Atlanta Federal Reserve’s GDPNow forecast was adjusted from a fourth quarter growth rate of 2.7% down to 1.5% after retail sales were factored in. Although it’s not an official forecast, it’s still worth looking to for running estimates. And with this forecast… ouch!

Remember, consumer spending drives nearly two-thirds of GDP. And retail sales make up about half of all consumer spending. So, December’s dismal retail sales will have a major impact on fourth quarter GDP.

Moving forward, the question will be: How will traders and investors look at the impact?

They could dismiss the poor figures, writing them off as a byproduct of the government shut down, or it could turn sentiments sour as investors see the drop as a sign of a slowdown…

Consumer spending is a leading indicator as to what direction our economy will go. When it slows (as it’s now doing) things look to head south… But the rising consumer debt shows that consumers are willing to spend what they don’t have.

Consumer debt hits record level

How much debt can consumers pile on?

Seriously, there’s a limit to the debt. I’m not saying we’re at or near that limit. But according to the Federal Reserve Bank of New York, overall debt rose to $13.5 trillion in the fourth quarter. That, folks, is a new record high!

We saw the previous high in Q3 2008.

Consumer debt is now 7% higher than it was during one of the worst financial crises in history.

What’s more troubling is that, as overall debt levels rise, the quality of debt falls.

Student loan balances are higher by $15 billion.

More than a 10th of the $1.46 trillion in total student loan debt are delinquent. The New York Fed stated that the actual level is likely higher because of deferments and forbearance.

And then there’s the record number of auto loans that were three or more months late. Auto loans that are delinquent rose by 2.4%, reaching over seven million.

That’s not a good sign of things to come…

Smaller tax refunds…

So, if consumers can’t borrow more – hitting their personal debt threshold – how can they spend more?

Well… they’ll usually spend the tax refund they start getting this time of year, right?

For those taxpayers getting refunds, between 2014 and 2018, the average refund was around $2,700.

To me, getting a tax refund just means you’re giving Uncle Sam an interest-free loan on your money. For many others, it’s a way to force yourself to save throughout the year.

It’s still early, but, so far, the average refund has dropped by a little over 8% this year to $1,865. That number comes straight from the IRS.

Because of the government shutdown though, returns processed are down nearly 26% compared to last year. There’s still time for the average to shift around. I’m thinking it’s going to move down further though due to the new tax laws.

Which brings me to the question Teresa asked in the Saturday Economy & Markets about the smaller tax refunds this year.

One reader, Kathy, wrote in saying this:

While I haven’t done my taxes yet, I would wonder if the lower tax returns that are disappointing people are the result of slightly higher paychecks throughout the year? I didn’t adjust my number of exemptions after the new tax law came into effect and I noticed my paychecks jumped a bit for the year. Since it was due to less money being withheld from my paycheck for taxes I fully expect to get a lower refund this year. No sweat!

For my work colleagues who changed their exemptions so that same amount was withheld they stated that their returns were roughly the same as last year. And since we live in one the states to get hit the worst by the tax reforms (heavily Democrat state and the tax reform limits what we can claim for state tax), I anticipate that others are ending up slightly better off than we are. It was my impression that it is primarily high-earning two-income families (most of your readership, perhaps?) who are the least likely to benefit from the reforms.

That’s right on the money, Kathy.

While some are blaming the Tax Cuts and Jobs Act passed in December of 2017 for their lower refunds, according to Mark Mazur, director of the Tax Policy Center, two-thirds of individual filers will get a tax cut, and 8% to 10% will get a tax increase.

Those getting a tax cut may have seen a larger paycheck in 2018. And they will see a smaller refund this year because they didn’t adjust tax withholding. So, it seems your work colleague adjusted accordingly to the changes made, which is why they saw roughly the same amount returned to them.

Worth noting…

But it’s worth noting that about five million people who received a refund last year won’t be getting one this year. More than 30 million taxpayers will owe the IRS. That’s up 18% from last year.

In 2018, the federal deduction for state and local taxes (SALT) was limited to $10,000. According to Bank of America, the lost deduction will result in an additional $3,000 in federal taxes on average. So, if you live in a place with high SALT, which was completely deductible in 2017, it now has a cap on it and that cap will greatly impact tax returns.

Though for some, the tax cuts are a bit of welcomed income, especially for some small-business owners. One such owner, Karen, wrote in to share this:

I’m a small business and I like the tax cut. I am getting a nice reduction in my taxes for my business income. I won’t owe any additional taxes and my refund will pay my estimated tax deposit for April…

Folks, it’s not all doom and gloom this tax season.

The bottom line…

Consumer spending drives two-thirds of our economy. The economy has been humming on all cylinders, but how long can that last if the consumer can’t or won’t spend more?

If the impact of the tax cuts passed in 2017 resulted in lower refunds, the usual jump in spending this time of year will be muted. If consumer debt is at a record high and delinquencies are rising, how much more can consumers borrow?

Is this party just about over?

Things seem to be winding down, but it’s still too early to say…

Lance

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Lance Gaitan
Lance Gaitan graduated from Franklin University in Columbus, OH with a degree in Finance. After graduating and working as an auditor for an insurance administrator as a number of years, he attained his securities license. He then went to work as a broker for a small firm and during the mid-1990’s Lance managed the futures trading desk for Piper Jaffray, a large regional brokerage firm based in Minneapolis. After migrating to Florida in early 2000, Lance founded a futures trading firm, GSV Futures, specializing in retail commodity trading strategies. Lance sold that business in 2006 and joined Harry Dent, Jr. and Rodney Johnson at Dent Research shortly thereafter.