We can look at the aggregate data and make conclusions about the U.S. economy and the state of the consumer.
Or, we can look at what companies say about its strength based on concrete facts like sales, earnings and traffic.
When faced with the choice, I will always go with the latter, especially when the latter is Home Depot (HD) , which gives you the best view of the consumer of any retailer in the nation. Right now, Home Depot's saying the consumer's all systems go, and you would never even think about a recession after listening to its blockbuster earnings call this morning. In fact, things are getting stronger not weaker and the recession chatter seems like a media-made-up canard.
What makes me so confident that you can trust Home Depot?
Simple: CFO Carol Tome, that's what.
We spend a huge amount of time interviewing limited Federal Reserve folk or hedge fund managers talking their book or strategists who have to say things to keep salespeople busy and clients happy.
But Carol Tome, who is retiring from Home Depot after 24 years at the company, has no agenda. None.
She says, "While global economic pessimism has increased due to geopolitics, currently the U.S. consumer remains healthy. Consumer confidence is near record high levels and wages are up over 3% from last year."
She also says, "The U.S. consumer is facing the impact of tariffs. While trade discussions are fluid, consumer demand could be impacted."
There. In a nutshell she has explained the dilemma we have in this country. The consumer's doing well, but the tariffs and the trade war with China are making people lose confidence.
She tells us not to fret too much.
"We are in the longest economic recovery in our nation's history," she tells us. "And yet the amount of growth during this recovery is still under the average of every other recovery in history. So this is one of the reasons why it's been an elongated cycle. Further the share of housing as a percentage of GDP has dropped. It's about 19% of GDP," she points out.
"Back in 2006, it was 22% of GDP," Tome says. So whenever that downturn comes, it's not like it's going to be like it was before.
To me that means there's plenty of room for the Fed to cut, especially because throughout the call we hear about deflationary pressures in the economy. That's reassuring.
So, if you put these two together, Tome's telling us that the Fed can have our back, given that the economy could still expand, but the tariffs are looming as a factor that could derail us.
Now, Home Depot makes it clear that we are winning the trade war. As Edward Decker, the executive vice president of merchandising says," I'm not aware of a single supplier who is not moving some form of manufacturing outside of China. So we have suppliers moving production to Taiwan, to Vietnam, Thailand, Indonesia and even back to the United States."
Therefore, he says, the changes will mitigate tariffs from a 2% impact in comp sales pricing to 1%.
Putting it all together, as someone who believes passionately in the tariff plan of the president, I believe this is the time to make a deal, a little more than a year before the election, in time to avoid a tariff-related recession, even if the Fed cuts rates.
If I were the president, I would heed this call and recognize that the industry that is the most important in this country, a huge percentage of the nation's business, is at risk at the precise time when the Chinese most surely would like a deal to stem the manufacturing exodus.
Is it time to go back to the tariff table and land a victory? After reading this conference call, I would say, yes, and, again, remember, Tome has no agenda.
She's not talking about the inverted-yield curve other than in a positive way, because it helps make homes more affordable. She's not bashing the Fed, even as she acknowledges an economy that's enjoying an anemic recovery with actual deflation in key categories, calling out lumber and paint.
She is making it clear that we are vulnerable to a confidence downturn in the most robust portion of our admittedly limited manufacturing economy. More important, home sales can buoy an economy, because they reverberate throughout white collar America.
So we don't want contractors, who are the predominant customers of Home Depot, getting cold feet because of tariff worries. These fears dominated the entire call and represented the lion's share of analysts' questions. You can see why they might: The company called out appliances and tools as especially strong, but décor, storage, indoor garden, building materials, paint, outdoor garden, hardware and plumbing are also robust. Only building materials are likely to have little to do with tariffs.
Or to put it another way, if I were a sitting president, a little more than a year away from an election, I wouldn't want to tip over the Home Depot wheelbarrow -- and just screaming at Fed Chief Jay Powell for rate cuts may not be enough, especially when Home Depot execs would say, I believe, that only tariffs can derail the positive portion of the cycle.
I'm not worried about Home Depot in a slowing environment. The company is so darned clever. Low interest rates? They use them to refinance higher short-term debt, which can keep merchandise prices low.
Digital? Growing at 20%, but it still represents only 8.9% penetration -- up from 7.5% a year ago. Plenty of room for more improvement there. The company knows how to profit from online. As CEO Craig Menear says, "While our stores remain the hub of our business, we know that many of our in-store sales are influenced by on-line visits and approximately 50% if all online U.S. orders were picked up in our stores during the quarter."
That's telling because if you are a mom and pop hardware retailer, how do you compete with that? You may not even be able to compete with that if you are Lowe's (LOW) , which is losing professional contractor share to Home Depot. The company's been focused on digitizing every aspect of its store from price labels to search capabilities and site functionality, all of which increase sales mightily year-over-year, incredible given that Home Depot only opens a handful of stores each year. The company's new fulfillment center now gives 50% of the country one-day delivery.
Now, I know what you might be thinking. How can we make a judgment about the economy by looking at just Home Depot? I come back and say, not true: Walmart (WMT) reported an amazing quarter last week, it just didn't give you the granularity we got from Home Depot, granularity that indicated the quarter got stronger as it went along. Amazon (AMZN) reported fantastic results as did Costco (COST) . Tomorrow, we get numbers from Target (TGT) , the T in my acronym of the retail giants of this country, and while I suspect it might not be as strong as the rest of WATCH, it has done amazing things to increase its digitization and has taken tremendous risks with store formats, something that they are now reaping the rewards from.
The bottom line: Home Depot's the perfect microcosm of the U.S. economy right now, and the outgoing CFO, Carol Tome, a heroine of mine, is an honest broker. Again, while I favor being as tough as nails on China, there needs to be an end to the tariff tangle at a certain point or the positives could turn into negatives and an expansion morph into a recession.
If it does happen, the fault will be in the government, not the stars, and that should be avoided at all costs.
Amazon and Home Depot are holdings in Jim Cramer's Action Alerts PLUS member club.
