Category Archives: Retail Sales

Retail Sales

March Retail Sales and Producer Prices

NAROFF ECONOMIC ADVISORS, Inc.

Joel L. Naroff

President and Chief Economist

215-497-9050

joel@naroffeconomics.com

KEY DATA: Sales: +0.9%; Excluding Vehicles: +0.4%/ PPI: +0.2%; Goods less Food and Energy: +0.2%

IN A NUTSHELL: “Consumers are picking up the shopping pace but they can spend a whole lot more.”

WHAT IT MEANS: It finally looks a lot like spring but that doesn’t mean the winter weather still isn’t with us, at least when it comes to economic data. Retailers took a hit because of the cold and snow and the March data seem to indicate that as conditions moderated, consumers started venturing out to the stores again. Retail sales jumped, helped by a sharp rebound in motor vehicle purchases. Indeed, vehicle purchases jumped 5.5%, though dollar sales were up less. There was also strong demand for furniture, clothing, building supplies and general merchandise. People also ate out a lot when they shopped. But not every segment got some additional loving by consumers. Sales of electronics and food for home fell and we also didn’t do a lot of shopping online. There was also a strange decline in gasoline purchases. Gasoline prices were up over 10% but sales, which are not adjusted for prices, were down. That doesn’t make much sense.

On the inflation front, wholesale costs rose moderately in March. Rising energy costs helped, though even excluding energy, producer prices increased a touch. Goods prices had been falling for several months, but no matter how you sliced or diced the data – and the report does that in a wide variety of ways – costs were up in March. That, actually, is a good sign as it indicates demand may be coming back. Services inflation, which has softened recently, moved back into the positive range. We had not been seeing much there as lowered transportation costs kept services prices under control. Looking down the road, the price increases in intermediate and unprocessed products generally fell only modestly. That points to a possible further slowing in the wholesale disinflationary process.

 

MARKETS AND FED POLICY IMPLICATIONS: March was a transition month as the weather eased, but not everywhere and not as much as most of us would have liked. The solid, though not spectacular, retail sales numbers point to a consumer that is finally venturing out. The rapidly improving April weather should lead to another solid rise in spending, though we will not know that for another month. This is the first indicator that supports the view that it was the weather, not a general economic slowdown, that led to the weak first quarter reports. That would normally make investors a little more comfortable, but we are in the midst of earnings season, so the hits and misses coming from companies will likely be the driving force in the markets. Since the Fed members try not to react to any given monthly number, the retail numbers should remind them that the April and May data, which will be out before the June FOMC meeting, could be telling. However, inflation remains quite subdued, so the Fed doesn’t have to be impatient. In other words, the April 28,29 FOMC will likely be non-event as there will be few non-weather-impacted data points that will be released before then that could cause a change in the statement.

 

Economic Indicators, Import and Export Prices, Retail Sales

December Retail Sales and Import Prices

KEY DATA: Sales: -0.9%; Gasoline: -6.5%; Internet: -0.3%/Import Prices: -2.5%; Nonfuel: -0.1%; Exports: -1.2%; Farm: -0.7%

IN A NUTSHELL:  “It doesn’t look like consumers shopped ‘till they were tired, let alone ‘till they dropped in December.”

WHAT IT MEANS:  In the critical holiday shopping season, it doesn’t look like the urge to splurge took hold.  Retail sales fell in December, but that was not a shock.  We knew that vehicle purchases had come down from unsustainable heights to more reasonable levels and gasoline prices had crashed.  These data are not adjusted for prices, so the decline in gasoline purchases was likely a price issue.  But there were weaknesses in other categories.  Electronics and appliance demand, which had been largely going nowhere, turned negative.  You mean everyone didn’t go out and buy a curved screen TV for a couple of grand?  Prices were low but there are no affordable new products that have caught peoples’ attention.  Phone sales seemed to be solid, but I guess not good enough.  The milder winter, at least compared to last year, probably helped create the sharp drop in Home Depot/Lowes type stores.  Households bought less clothing, sporting goods and general merchandise as well.  But we did spend more money on food – both at home and away – as well as on furniture.  That was it.  Not a lot of shopping went on.

On the inflation front, there is none.  Import prices fell sharply as energy drove the decline.  Excluding fuel, costs were off modestly.  Consumer and capital goods costs edged downward while vehicle prices were flat.  Unfortunately, food costs keep rising and that is not good news for the consumer.  On the export side, prices were down pretty much across the board, led by a huge drop in energy and a sharp decline in agricultural prices.

MARKETS AND FED POLICY IMPLICATIONS:  Rising consumer optimism, more jobs and lower energy costs were expected to create a really good holiday shopping season.  It doesn’t look like that happened.  I guess for all those workers who didn’t see any increase in incomes, buying a whole lot more was not in the cards.  We need better wage gains so the 147 million people employed have more money in their paychecks.  That still is not happening, so business people who are disappointed by the economy should keep in mind that if they don’t pay their workers more, their workers cannot spend more.  The other thing to remember is that the additional money left in peoples wallets when they leave the gas station is relatively small.  It takes time for the impact to build up.  Thus, while spending should rise, don’t expect it to surge. So, what do these reports mean for the markets and the Fed?  Investors will not like the retail sales report as it relates to earnings.  But a solid but not robust economy, coupled with no inflation means the Fed can be very patient.  That should assuage some of the angst.  Regardless, I have no idea what is driving investors at any given moment these days and given the volatility, I don’t think anyone does.

Economic Indicators, Import and Export Prices, Retail Sales, Weekly Jobless Claims

November Retail Sales, Import Prices and Weekly Jobless Claims

INDICATOR: November Retail Sales, Import Prices and Weekly Jobless Claims

KEY DATA: Sales: +0.7%; Excluding Vehicles: +0.5%; Gasoline: -0.8%/Non-Fuel Import Prices: -0.2%; Fuel: -6.7%/Jobless Claims: 294,000 (down 3,000)

IN A NUTSHELL:   “A firm labor market is helping power stronger retail sales and it looks like we are having a very, merry holiday shopping season.”

WHAT IT MEANS:  Apparently, the reports of the consumers’ demise are premature.  The National Retail Federation was downbeat about Black Friday demand, but with sales running a week or two and Cyber Monday lasting a week, it appears households are shopping ‘till they are at least tired.  Retail sales soared in November and it wasn’t just the jump in vehicle purchases that propelled revenues forward.  Excluding vehicles, sales were still strong even when gasoline was included.  Declining prices led to a sharp drop in fuel purchases and excluding that portion of sales makes the rise even greater.  Indeed, the increases were essentially all across the retail landscape.  People even went to furniture and department stores, two areas that had been lagging. 

On the inflation front, the Fed has nothing to fear, unless they are hoping for higher inflation, which the members are.  Import prices fell in November and the declines were also across the board.  There was even some relief on the food side, which had been running counter to most other import prices.  A strong dollar is probably helping foreign companies grab for market share by lowering prices.

As for the labor market, another number, another indication that the November jobs report, while high, was not a total aberration.  Jobless claims continue to moderate and there is little reason to think that the December payroll increases will be weak.  The levels are consistent with job gains in the 250,000 range and a steady fall in the unemployment rate.  Only the return of frustrated workers can keep the unemployment rate from coming down consistently.

MARKETS AND FED POLICY IMPLICATIONS: It seems to be all coming together.  The labor market is continuing to improve, falling gasoline prices are adding to spendable income and households seem to be using that money to buy lots of things.  The holiday shopping season appears to be off to a very good start but we still have a couple of weeks to go.  Bad weather may create some ebbs and flows in the sales but I expect demand to be strong.  Last month I suggested that the holiday season could show upwards of a 5% rise and I am buoyed by the latest reports.  If we get anything close to that, we could have another quarter of GDP growth at or above 3.5%, confirming that the economy has shifted gears.  Next week the FOMC meets and it will be interesting to see how the members view the economy.  I think it is time to drop “considerable time” from the statement but whether that happens this month or next, it is coming.  The real issue is the first rate hike.  I think in spring the Committee will set the range around 25 basis points.  While that will not be a large move, it will signal the start of a long but steady process of rate hikes.

Economic Indicators, Producer Price Index, Retail Sales

September Retail Sales and Producer Price Index

KEY DATA: Sales: -0.3%; Vehicles: -0.8%/PPI: -0.1%; Goods: -0.2%; Services: -0.1%

IN A NUTSHELL:   “It looks like consumers have pulled back and while declining energy costs should help, there are questions about how strong growth will be going forward.”

WHAT IT MEANS:  Consumers are showing no signs of irrational exuberance.  Actually, there were few signs of any exuberance in the latest retail sales report.  Demand fell in September, but that was expected.  August vehicle sales were off the charts so the easing back to a more sustainable level was known and factored in.  Also, a sharp decline in prices was expected to cause gasoline purchases to drop, which they did.  But even adjusting for those two, sales were still off as demand for building materials, clothing, furniture and sporting goods declined.  We didn’t even shop online, which is a real surprise.  So, where did we buy? Electronics and appliances, and while we were out, we ate out.

The one thing that could cause the Fed to dawdle is concern that inflation could become too low.  The September wholesale prices report didn’t help ease the concerns of those on the FOMC who want to keep rates low for a considerable time.  The Producer Price Index fell as costs of both goods and services were down.  Energy led the way and that trend continues unabated.  That is good for the economy as energy costs are more an indicator of consumer spending power than inflation.  The drop is adding significantly to purchasing power.   The only component where prices jumped was unprocessed consumer food products.  However, that rise came after two months of huge declines.  Meanwhile, processed food costs eased, though they had been rising sharply.  Looking down the road, the rise intermediate and crude food prices indicates that consumer food costs will increase.  Otherwise, the pipeline is largely empty so inflation should continue at a modest to moderate pace.

The New York Fed’s Empire State Survey dropped sharply in October. It remained positive.  The headline overstates what happened.  This is a diffusion index and most of the change came from respondents saying that activity remained the same rather than increased.  There was little change in the percentage that said conditions or orders actually declined.

MARKETS AND FED POLICY IMPLICATIONS: It was expected that households would continue shopping for lots of things at a decent pace, but that didn’t happen and as a result, third quarter growth estimates could be revised downward.  To the extent that issues such as Ebola and ISIL are causing confidence to ebb, the moderating sales may be temporary.  But that is to be seen and since those two concerns have only deepened this month, I am not sure what to expect from the October retail numbers.  This has to worry the Fed, which meets at the end of the month.  With inflation below target and bond yields dropping, the doves will be flying high at the next meeting and we should expect that the “considerable timers” will rule the day.  But for the markets, the turmoil in foreign economies, uncertainty about the Middle East and Ebola and the growing reality that 25% increases in equity prices is neither sustainable nor even rational, may be causing reality to set in.

Economic Indicators, Import and Export Prices, Retail Sales

August Retail Sales and Import Prices

WHAT IT MEANS:  The missing link in this economy is strong household consumption.  It’s hard to buy more when your pay is barely keeping up with inflation.  But wage gains are slowly improving and with so many more people working, income is growing.  The added funds are being spent on just about everything.  Retail sales jumped in August, led by a surge in vehicle sales.  With the vehicle sales pace of 17.4 million units being the highest in over eight years, that was hardly a surprise.  But even when you exclude vehicles, consumers were pretty frisky.  Demand for furniture, appliances and electronics, sporting goods, home building supplies, medical products and clothing were all up.  We even went out to eat again.  The only weak links were department stores and gasoline stations.  The decline in gasoline purchases was probably due to the sharp drop in prices, not a fall off in purchases, as these data is not inflation-adjusted.  All this came on top of an upward revision to July sales.

Household spending power is not likely to be eroded very much by inflation.  Import prices dropped sharply in August as fuel costs cratered.  Excluded energy, prices rose just a little, with only vehicles showing a gain, though that was minimal.  The only real trouble spot is manufactured food import costs, which continue to surge.  As for exports, U.S. firms are also getting less for their products with the farm sector once again suffering sharp drops in its goods.

MARKETS AND FED POLICY IMPLICATIONS: The second quarter is setting up to be pretty good.  Consumers are spending again and not just on vehicles.  Right now they are being helped by the drop in gasoline costs, which is leaving a lot more money in their wallets.  Indeed, low inflation is has kept consumption from largely disappearing and with import prices essentially going nowhere, minimal inflation pressures are likely to continue.  Once we get better wage gains, spending could really surge.  The Fed generally treats energy costs as an indicator of consumer spending, not inflation and it looks like the downward trend in prices and the upward trend in household spending should continue.  Since it is all about a tightening labor market and the potential for rising wages, this report should buoy the spirits of the inflation hawks who worry that the Fed is waiting too long to start raising rates.  The FOMC meets next week and the pressure is building for the statement to drop the words “extended period” when describing how long rates will be kept low.  That would provide the flexibility to start tightening sooner than expected.  I suspect that will happen, since the public discussion about doing that has largely taken away any shock that would occur if the statement actually drops that language.  As for investors, it is the usual: Does good economic news trump rising rates?  Who know what side of that coin comes up on any given day?

Economic Indicators, Retail Sales

July Retail Sales

KEY DATA: Total Sales: 0.0%; Excluding Vehicles: +0.1%

IN A NUTSHELL:  “The consumer has taken a holiday from shopping.”

WHAT IT MEANS: Remember the phrase “shop ‘till you drop”?  Well, forget about it.  Consumers are not shopping very much at all.  I often argue that we shouldn’t expect a major return to the malls (or Internet) until incomes started growing.  Since incomes are not growing, it is not a major surprise that retail sales would be sluggish.  But this is getting ridiculous.  For the second consecutive month, households skipped the trip to the store.  July retail sales were flat after rising modestly in June.  We knew that vehicle purchases eased from the robust June sales pace but that is hardly a concern as they are still at a very strong level.  The real worry is weakness in electronics and appliances, which has been faltering since they surged in the first quarter.  A similar trend was also seen in furniture sales.  It looks like a new vehicle is the only big-ticket item people are buying.  Sales at department stores were down sharply, indicating a trip to the mall was not something a whole lot of households did.  Not every retailer hit the skids in July.  Supermarkets, restaurants, sporting goods, health care, building materials and clothing stores all posted gains, though they were nothing special.   

MARKETS AND FED POLICY IMPLICATIONS:  People just don’t seem to be into shopping right now.  Undoubtedly, income is an issue.  But six years of economic uncertainty may be changing spending patterns, at least for a while.  Consumers are finding they can live without a lot of the stuff they used to buy automatically.  Our consumption society bought an awful lot of things that we probably didn’t need but thought it might be nice to own.  Just as the Great Depression scarred a generation of consumers, the Great Recession may be modifying the need for things.  How long that “I don’t need that” attitude may last is unclear.  We will not really know until incomes start rising strongly for an extended period.  But there is a good possibility that the savings rate during this expansion will be higher than during the housing bubble-driven spending boom in the 2000s.  Savings as a percent of disposable income was on a clear downward trend from 1975 to the beginning of the recession in early 2008.  Fear and financial necessity drove the rate up.  It is down somewhat this year but it is still above the average posted from 2000 to 2007.  Regardless, right now people are just not parting with their hard-earned funds and that is a concern.  For the Fed, though, softer retail sales mean more moderate economic growth so there is less need to raise rates.  That should make investors happy, even as it raises questions about earnings.

Economic Indicators, Import and Export Prices, Retail Sales

June Retail Sales and Import Prices

KEY DATA: Retail Sales: +0.2%; Excluding Vehicles: +0.4%/Import Prices: +0.1%; Excluding Fuel: -0.1%

IN A NUTSHELL:  “Consumer exuberance remains restrained and that raises questions about how strong the economy can or will grow.”

WHAT IT MEANS: The winter or our consumer discontent continued into the spring of our shopping boredom.  Most economists assumed that the weather drove down spending in the first part of the year but that would change dramatically as we got to the summer.  Well, spending is up but not nearly as robustly as forecast.  Retail Sales increased less than expected in June.  Strangely, vehicle sales fell.  I say strangely because unit sales hit their highest level in eight years in June.  After going crazy at the Home Depots of the world in April and May, demand for building supplies collapsed in June.   And since we weren’t shopping like crazy, we didn’t eat out a whole lot either.  But there were positive signs in the data.  Sales of food, clothing, sporting goods, health care products and appliances and electronics were up.  We shopped online and at general merchandise stores, so we really did spend some money.  These are the products that show up in the consumption component of GDP so we could see a decent spending number when the second quarter growth rate comes out on July 30th, the same day the next FOMC meeting ends.

Consumers can continue to buy lots of things, even with limited incomes, since inflation is well restrained.  We saw that again with the import price numbers.  The cost of foreign products rose minimally in June but most of the gains came from a jump in energy costs.  Food prices fell while the costs of consumer goods, capital equipment and vehicles were flat.  In other words, consumer purchasing power, at least when it comes to most imported products, is holding up.  On the export side, a similar pattern was observed as prices fell pretty much across the board.

MARKETS AND FED POLICY IMPLICATIONS: I keep saying we cannot get strong growth until we get strong income growth and so far we don’t have either.  Part of the problem with the expected rebound in spending is that some of the demand was lost forever.  If we didn’t go out to eat in February, we were not going to make up for that in June.  But another, longer-term change may be in the wind: The long-lasting, slow recovery may be eroding the “shop ‘till you drop” mentality.  People may be discovering they really can live without all the things they used to think were necessary.  Doing without for a short time may cause only temporary reductions in demand but cutting back for an extended period could change habits.  We will see what happens when income growth gets back toward decent levels, but we have to consider that the Great Recession and the Not-So-Great Recovery have modified spending patterns. With the Fed worried about disappointing growth, the decline in non-fuel import prices provides further cover to keep rates low for an even longer period of time.  Inflation is hardly a threat right now.  As for the markets, the focus of attention is where it should be, on earnings.

Economic Indicators, Import and Export Prices, Retail Sales

May Retail Sales and Import and Export Prices

KEY DATA: Sales: +0.3%; Excluding Vehicle: +0.1%/Non-Fuel Import Prices: 0%; Farm Export Prices: +0.5%/Jobless Claims: 317,000 (up 4,000)

IN A NUTSHELL:  “Consumers are out shopping but maybe not as much as hoped.”

WHAT IT MEANS: Households spent money in May but they were  hardly irrationally exuberant with their purchases.  Retail sales rose moderately but that came on top of an upward revision to the April gains so this report is somewhat better than it appears on the surface, or if you only looked at the headline number.  Robust gains in vehicle sales were expected to push total retail demand up more sharply but that was based on a modest rise that was initially estimated for April.  The previous month’s increase is now put at a very respectable 0.5% pace, not a mediocre 0.1% rise.  So far this quarter, retail sales are rising very solidly.  Outside the expected jump in vehicle demand, the rest of the report was a bit strange.  There were solid increases in furniture, building supplies and Internet retailers but weakness in electronics and appliances, clothing, department stores and food.   So it is unclear what people are thinking when they go out to shop.

On the inflation front, import prices remain pretty tame, especially when you exclude fuel.  We are beginning to see the pressure on food costs easing, which is good news for consumers.  Imported capital goods prices did tick up, but there is not a lot of pressure there, which is also the case with consumer goods.  On the export side, farmers are beginning to get some more money for their products, which is good news for the agricultural sector.

As for the labor market, jobless claims rose a touch but the level remains low enough that we are likely to see another very solid job gain when the June employment data are released.  We could also see the unemployment rate ease as well.

MARKETS AND FED POLICY IMPLICATIONS: We are having a spring rebound though it may not be quite as robust as we had hoped.  Consumer spending is clearly rising and another decent gain in June would cement the belief that households are once again playing their part in the recovery.  What will propel things faster, though, is some pay increases.  That seems to be coming as the low level of unemployment claims points to further tightening in the labor market.  But we are months away from the point where businesses will realize that conditions have turned.  After having dismissed worker compensation from their minds for so long, it may take a crisis before many executives recognize they have a real problem on their hands.  As for the markets, this should be a largely non-event.  With international issues playing a part in trader thinking, I suspect not much will be made of any of the reports released today.