KEY DATA: Sales: 0.1%; Excluding Vehicles: -0.3%/ PPI; -0.5%; Goods: -1.2%; Energy: -5.9%; Excluding Food and Energy: 0%; Services: -0.4%
IN A NUTSHELL: “Consumers have become more cautious, though lower prices are helping keep their total spending down.â€
WHAT IT MEANS: Is the economy growing strongly or softly? The answer, if you believe the data, is yes. On the surface, the September retail sales report looks pretty disappointing. But the details don’t necessarily indicate that. Households bought lots of big-ticket items such as vehicles and furniture, but didn’t hit the appliance or electronics store at all. Sales of clothing and sporting goods surged but spending at gas stations, supermarkets and home stores was off. We didn’t buy online but boy do we like to eat out. So what do we make of this? First, it is good to see that there is enough confidence so buy expensive products. Also, these data are not adjusted for prices, so the fall in gasoline sales and at supermarkets may be more a function of declining costs rather than unit sales. Indeed, the average price of gasoline fell nearly 10% in September but sales of gasoline were down only 3.2%. It looks like we were enjoying driving again and at a lower cost! I suspect the inflation-adjusted numbers will look much better than the unadjusted ones.
On the inflation front, the ability to buy more but still pay less for some products looks like it is not going away soon. Wholesale prices fell sharply, helped by another huge decline in energy costs. For the eighth time in eleven months, food prices declined. If you drive and eat, you are doing pretty well. In addition, services costs, which had been rising moderately, took a turn downward. And if you look at the special indices, which break out wholesale prices by just about every combination possible, it was almost impossible to find one that had a positive sign. Even my beloved bakery product prices are going nowhere. There are also no price pressures in the pipeline, as intermediate and crude costs were down. About the only place there is any inflation is in finished consumer goods less food and energy. This index rose moderately in September and over the year, it was up 2.6%.
MARKETS AND FED POLICY IMPLICATIONS: The economy is still in good shape but it is hard to make the case that it is booming. Can it absorb some rate hikes? Undoubtedly. Retail sales are still solid enough that consumer spending will be strong in the third quarter. But it is inflation that is the real issue. The “sturm und drang” at the Fed over China notwithstanding, it is the uncertain course of inflation that could keep the FOMC from hiking rates this year. Unfortunately, the gang that cannot communicate straight is still sending out as many unclear signals as possible, so we will simply have to wait until the statement is released on December 16th to really know if rates are going up. It is highly unlikely anything will be done at the October 27-28 FOMC meeting. As for the markets, today’s numbers will likely be viewed as showing economic weakness, though I don’t’ think that is entirely accurate. Is that good or bad for equity prices? Got me, though the recent theory is that what is good for the economy is bad for stocks. Crazy, I know. But the soft inflation data should keep interest rates down.