Retail Sales rose by 1.1% in February (month to month) and were up 4.5% annually, according to the Commerce Department’s February Advance Retail Sales Report. Those are seasonally adjusted idealized estimates, which will be revised several times before they are finalized. Neither figure is adjusted for inflation. The median forecast of economists was for a monthly increase of 0.5%. As has usually been the case for the past half year or so, the economic consensus was too low.
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.
This analysis uses not seasonally adjusted (NSA) data due to the inaccuracy and potentially misleading nature of seasonally adjusted data.
The year to year change in real retail sales, ex gasoline prices and adjusted for inflation in February was not a gain at all as the headlines blared, but a decline of 0.5%. This compares with a year to year increase of 4.9% in January. However, last February 2012 had an unusually strong gain that was well beyond typical norms for the month, so that the year to year comparison this month is much tougher than it would normally be. I therefore think that this decline will turn out to be an anomaly. For the past year, the year to year gains have typically been from 2% to 5%. That represents some deceleration from the gains of 2011. I suspect that the year to year change for March will return to that range.
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Historically February is a mixed month for this data, showing both increases and decreases. This year February declined 0.6% from January. February had an odd increase of 4.8% in 2012, and was up 0.8% in 2011. The average change for the 10 year period from 2003 to 2012 was a decrease of 0.5%. The performance of retail sales in inflation adjusted terms, after backing out gasoline sales, was weaker than the headline numbers suggested but close to the average performance for the month over the prior 10 years.
Gasoline prices rose 42 cents a gallon through February 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 gas prices cuts consumers’ ability to spend more on other things. Consumers were also hit with increased Federal payroll and income taxes in January. The fact that retail sales weren’t weaker than they were under the circumstances suggests that consumers could be liquidating assets and digging into savings to continue spending. However, real time withholding tax data after adjusting for the tax increases, suggested that there were very strong income gains in February as more people found jobs. That helped to offset the drag effect of the increase in gas prices.
The Fed’s QE3 and 4 continues to risk 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 2012, and there were offsetting influences that absorbed much of that cash at that time. Mid December was the first time that Fed money printing came to bear in full in the markets. Gas prices are up 37 cents a gallon since then, and that’s after a pullback of 14 cents since mid February.
While the Fed has been masterful at jawboning speculators away from commodity speculation by threatening an early end to QE in speeches and FOMC meeting minutes, eventually if it does not act on those threats, the “boy who cried wolf” syndrome will set in. Traders will then drive oil prices higher. That would crimp retail sales and defeat one of the Fed’s supposed purposes for QE.
The real rate of growth in the retail sales ex gas was between 3% and 7% in 2011, falling to 1% to 5% in most of 2012. In a nation where population is growing at slightly less than 1%, a retail sales real growth rate of several times that is pretty amazing. But it’s notable that the growth rate has trended down even as the Fed has engaged in more money printing.
The Fed has resorted to that money printing in an effort 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 averaging 2.8% over the past year. Most of the money the Fed has created is just sitting idle in bank accounts, a growing inflationary powder keg that could ignite at any time if the momentum of the economy heats up. The Fed should be careful what it wishes for. It just might get it, along with all the unintended consequences that it does not want.
Past rounds of QE suggest 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 decline in input costs reflected in weaker commodity prices in late 2012, 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.
Recently we’ve seen the best of all worlds with commodity and energy prices subdued and retail sales steadily rising until last month. 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. In the current cycle, February was the first month in which the year to year change went negative. If a pattern similar to 2005-07 were to unfold in this bull market, the top of the current market may be a year or two away.
The real driver of this market is the Fed, and the real issue is how long it will take the forces of inflation to slow the economy and force the Fed to end the money printing. The gradual decline in the real growth rate of retail sales ex-gas is an early warning.
This report is excerpted from the permanent charts page on Real Retail Sales.
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