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Monday
Oct152012

Forget The Retail Sales Headline Number - After Inflation, Sales Barely Rose

Contributed by Lee Adler, The Wall Street Examiner.

Retail Sales rose by 1.1% in September (month to month) and 5.4% annually, according to the Commerce Department’s September Advance Retail Sales Report. Those are seasonally adjusted idealized estimates. Neither figure is adjusted for inflation. The median forecast of economists was for a gain of 0.7%. As usual, they had mostly extrapolated the prior month’s gain. And as usual, their forecast was wrong by a wide margin.

 Retail Sales and Real Retail Sales Ex Gasoline – Click to enlarge

The year to year change  in real retail sales, ex gasoline prices, and adjusted for inflation in September was  a gain of 1.5%. That’s down from a gain of 4.6% in August (revised). It brings the gain to the low side of the range of annual growth rates that has been between +1.5% and +7.3% since March 2010.

Note: When analyzing retail sales, I’m interested in the actual volume of sales, not the inflation skewed dollar total. To get to the kernel of the matter, I look at the real, not seasonally finagled retail sales, adjusted for top line CPI inflation (not core which normally understates the actual).  Then I back out gasoline sales, which are a substantial portion of total retail sales. Gasoline sales distort total retail sales higher when gas prices are rising, when they actually act like a tax on disposable income and reduce non-gasoline sales. On the other hand, when gas prices fall, the top line total retail sales figure will understate any gains in the volume of sales.  Gasoline sales typically account for around 12% of total retail sales. By subtracting gas sales and adjusting for inflation, the resulting number represents the actual volume of retail sales.

Real Retail Sales 1998-2009

Over the past 15 years, there was one instance, in 2006, where the year to year change went this negative and then rebounded the following month, without resulting in a recession or a bear market in stocks. But in both 2000 and 2007 such negative readings corresponded with the onset of recession and bear markets.

This analysis uses not seasonally adjusted (NSA) data due to the inaccuracy and potentially misleading nature of seasonally adjusted data.  In this context, historically, September is always a down month. This year real sales ex gas fell by 7.8% month to month. That was much weaker than the corresponding period of last year (-4.9%) and 2010 ( -4.6%). It was also slightly weaker than the 2002-2011 September average of -7.3%.

Rising gas prices are having an impact. Rising gas prices are a de facto tax on consumers that cause reduced consumption of other goods and services. Demand for gasoline is relatively inelastic so as gas prices rise, they suppress demand for other retail products. QE3 runs the risk of exacerbating the trend of rising gasoline prices, just as its predecessors did. If gas prices continue to rise, retail sales and the economy as a whole could begin to contract, checkmating the Fed.

The initial advance retail sales estimate is based on a small survey sample and is subject to revisions that could make the comparisons slightly more or less favorable when the final estimates are in but the revisions are normally not material. The calculation of “real” sales is also dependent on last month’s CPI reading, since the September reading will not be released until tomorrow (October 15). If CPI upticks from August, that will further depress the real data. The PPI release for September suggests that CPI will be up.

In the big picture, the current “recovery” has been weak relative to the past when “growth” was driven by seemingly endless expansion of debt. The real rate of growth has been in the vicinity of 2%-3.5% on average. In a more balanced economy not driven by growing debt, in a nation where population is growing at slightly less than 1%, that is probably the best that can be expected.

Likewise, today’s unemployment rates are probably normal, and not cyclically elevated as the Fed seems to think. The Fed thinks the ultra low bubble unemployment rates of 5.5 to 6% are normal. NY Fed President Bill Dudley reiterated in a speech today that the Fed would continue QE even after employment improves. The misguided desire to get back to bubble unemployment rates is what is driving their panic. But past rounds of QE suggest that this one will result in the unintended consequences of a cost squeeze on business profits and inflation pressure on middle income consumers that could choke off the recovery in a few months. The top 10% would have to massively increase their spending to offset the drop in spending by the 90%. There’s little indication in today’s data that that would happen.

This post is an excerpt from the Retail Sales permanent charts page, updated when new data becomes available. You can bookmark it for future reference.

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