Posted on NOV 30, 2017
Johnson Bank Wealth Weekly Investment Commentary | Thursday, November 30
This is part of an ongoing series of Weekly Commentary articles published by Johnson Financial Group.
This week's issue is written by Brian Andrew, SVP, Chief Investment Officer.
How Much for That Motorcycle?
One of my passions is motorcycling. I share this passion with my son, to my wife's dismay. As he approaches his birthday, next month, he has become interested in getting a motorcycle of his own. We have been online regularly reviewing bikes and their features and prices. I found an electric motorcycle which allows for greater speed control and noticed something interesting. My wife has a very strong aversion to getting any motorized transportation vehicle for my son – but that isn't the only thing that was interesting. The price disparity of the bike I found was significant based on where it was available – online versus in‐store.
My experience reflects a significant transition for all consumers. When faced with a purchase, large or small, we have the technology (also known as a phone, which now seems like a quaint reference to something from a bygone era) to make price discovery our first point of differentiation among products. It is possible that one of the reasons for muted price inflation in the economy has to do with the ease of price discovery. If you are in the business of selling products, you must understand how to manage sales given the fact that price may be more meaningful than brand, or at least as important, to consumers.
In my case, there was a 40% difference between the most expensive and cheapest version of the motorcycle brand and model I was researching. More importantly, the lowest prices were available from retailers I would not have considered. Office Depot (I would not have guessed they sell electric motorcycles) was the lowest. In addition, they were covering shipping due to a Black Friday sale and the motorcycle was available for delivery Monday.
This form of price discovery not only affects the level of inflation; it also has had a meaningful impact on retail sales.
According to Adobe Analytics, Black Friday shoppers spent $3.54 billion, a 15.6% increase over last year. Add to that the $2.87 billion spent on Thanksgiving Day and, despite headlines to the contrary, it would seem consumption is alive and well for the holiday season, which is expected to bring over $100 billion in retail sales. However, the big retail news story may be that Cyber Monday sales were $6.59 billion, surpassing Friday's in‐store sales for the first time. Sales were up over 16.8% from the prior year, and mobile phone sales topped $2 billion! According to Adobe, Monday was the largest online shopping day ever.
All of this suggests that the forces at work against higher price inflation will remain a secular trend for some time to come. That is relevant because the Federal Reserve focuses on the level of inflation as part of its management of interest rate policy.
The Economy and Inflation
On Tuesday, the second estimate for third quarter economic growth and inflation was released. It showed that U.S. economic growth was actually a little faster than originally thought, up 3.3%. One of the reasons for this improvement in the estimate had to do with a revision to the business investment numbers. Companies have begun to invest more in growth as the economy improves. Business investment was estimated to be up 10.4% instead of the originally reported 8.6%. This acceleration also reflects a greater confidence level among business owners and managers to make longer‐term investments for growth. Stock investors have taken notice, and the rally in stock prices continues as a result.
The inflation measure that is released with the growth update was up 1.5% year‐over‐year. The Fed has targeted a 2% level of inflation for some time. Once again, inflation seems to push against the Fed's desire to see prices advance that quickly, and we have another disappointing report, from its perspective.
The current Fed Chair, Janet Yellen, noted in her testimony to Congress on Wednesday that the lower level of inflation “could reflect something more persistent” than the Fed currently understands. Maybe the Fed Chairwoman should shop for an electric motorcycle online and she would find some clear evidence as to why inflation is persistently below expectations.
Her soon‐to‐be replacement, Jerome Powell, was in front of the Senate on Tuesday for his confirmation hearing. He echoed Chair Yellen's sentiment on inflation, suggesting that there may be some permanence to lower inflation. A lower level of inflation could mean fewer hikes in the Federal Funds rate and a persistently lower interest rate environment for some time.
Inflation, i.e., price increases, is a necessary evil because it affects buying behavior. If inflation is non‐existent or negative for an extended period of time, consumers will postpone purchases in the belief that they can obtain goods at lower prices. This hampers economic growth, something we've all witnessed in the slow growth, low inflation economy of Japan. However, we don't think this is Japan.
Retail sales over the holiday weekend would suggest that demand is there; however, it may be that smart shoppers armed with mobile phones using price discovery as their favorite weapon are keeping prices down.
And no, I didn't buy the motorcycle from Office Depot, despite the amazing deal. Still working on Mom to make that happen!
As Chief Investment Officer, Brian Andrew leads Johnson Financial Group's investment strategy
to provide consistent, actionable investment solutions for our clients.
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