Real Retail Sales Rising On Trend, But Rising Gas Prices Could Crimp Soon

Retail Sales rose by 0.1% in January (month to month)  and were up 4.4% annually, according to the Commerce Department’s January Advance Retail Sales Report. Those are seasonally adjusted idealized estimates. Neither figure is adjusted for inflation. The median forecast of economists was for a monthly increase of 0.1%.  They guessed right for once.

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

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

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.

The year to year change  in real retail sales, ex gasoline prices and adjusted for inflation in January was a gain of 3.8%. This compares with a year to year decline of 0.1% in December, which interrupted a string of year to year gains going back to January 2010.  The January year to year gain is back in the ballpark of those gains.

This analysis uses not seasonally adjusted (NSA) data due to the inaccuracy and potentially misleading nature of seasonally adjusted data.  In the context of actual unadjusted data, historically January is always a  big down month versus December for obvious reasons. The drop from December was -20.3%. This was an improvement over the corresponding period a year ago (-23.3%) and 2010-11 (-23.2%). It was also better than the 2003-2012 January average of -23.0%. So the performance of retail sales in inflation adjusted terms, after backing out gasoline sales, was a bit better than the headline numbers suggested. That follows a December performance that was worse than in any year since 1992.

That stall turned out to be just a calendar related blip, not an advance warning that the economy was on the verge of weakening. As I surmised last month, heavy Black Friday promotions in November, earlier than historically customary store openings on Thannksgiving, and an extra shopping week in November due to the early date of Thanksgiving, apparently stole some sales from December. There were no similar warning signs in other data, in particular the more timely jobless claims.  The rebound in the January number suggests that December’s weakness was a fluke for the reasons cited.

Gasoline prices rose 23 cents a gallon through January according to the US Energy Information Administration. Rising gas prices are a de facto tax on consumers that can cause reduced consumption of other goods and services since demand for gasoline is relatively inelastic. The rise in prices should have cut consumers’ ability to spend more on other things.  Consumers also faced increased tax rates in January. The fact that retail sales did as well as they did under the circumstances is surprising. I have to wonder if a hangover might not show up in February. So far, the withholding tax data does not indicate one. It continues to show very strong growth in incomes.

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QE3 and 4 runs the risk of stimulating rising gasoline prices, just as its predecessors did. Speculators tend to see crude oil as a money substitute when central banks are engaging in money printing. The Fed’s QE3 securities purchases only began to settle in November, and there were offsetting influences at that time. Mid December was the first time that Fed money printing came to bear in full in the markets. That’s when a downtrend  in energy prices stopped.  The impact of QE3 and4 should be be seen in the months ahead as that cash flows into the financial markets.

The real rate of growth has been in the vicinity of 2%-3.5% on average over the past couple of years. In a nation where population is growing at slightly less than 1%, a retail sales real growth rate of 2.5-3.5 times that seems pretty amazing. The Fed has resorted to money printing in an effort to drive growth at an above trend rate to try to spur job growth. It has managed to drive money supply growth to an annual growth rate in excess of 7%, but that has only translated to real retail sales gains of 2.5% to 3.5%. The rest of the money the Fed has created is just sitting in bank accounts, a growing inflationary powder keg under ever increasing pressure.

Past rounds of QE suggests that this one will eventually 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. The recent decline in input costs reflected in weaker commodity prices, particularly energy, took the pressure off temporarily. QE3  cash really began to flow in December, with the added cash of QE4 hitting the market in January. The effects should be seen in commodity prices within a few months.

The Fed has had some success at jawboning speculators away from buying commodities by threatening an early end to QE, but that can only work for so long. If the Fed doesn’t actually end QE soon, traders will catch on to the fact that the Fed is crying wolf, and they will start to steadily buy and push prices higher.  Coupled with tax increases, rising energy costs would then probably depress retail sales again. Those two forces could spiral into a vicious cycle of rising costs, reduced retail sales, and job cuts, the exact opposite of what the Fed is seeking to gain by printing money. So far, that hasn’t happened. The Fed has been somewhat skillful and mostly very lucky in preventing that. But their game can only work for so long.

Recently we’ve seen the best of all worlds with commodity and energy prices subdued and retail sales steadily rising.  The rise in gas prices since December could be the first sign that the rosy scenario is about to darken.

With regard to stock prices, this indicator had a long lead time versus the 2007 stock market top. The annual growth rate of real retail sales ex-gas was in a negative divergence versus stock prices for 2 years before stocks topped out. The growth rate went briefly negative a couple of times in the year before stocks topped out.  If the same thing were to occur in this bull market, the top of the current market may be a year or more away. No two markets are exactly alike however, and I suspect that when the annual growth of real retail sales ex-gas turns negative this time, stock prices will not be far behind.

This report is excerpted from the permanent charts page on Real Retail Sales

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